Sequence of Returns and Withdrawals (SoRW)
The table below shows an example of 20 years of Annualized Returns of two portfolio’s. They have very different rates of return each year but have the same 20-year annualized rate of return of 5.61% and ending investment balance of $2,980,878.
20 Year Average Annualized Rate of Return |
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Scenario #1 |
|
|
Scenario #2 |
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|
|
|
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Year |
Return |
$1,000,000 |
|
Year |
Return |
$1,000,000 |
|
1 |
-8.20% |
$918,000 |
|
1 |
32.43% |
$1,324,300 |
|
2 |
-11.76% |
$810,043 |
|
2 |
-3.28% |
$1,280,863 |
|
3 |
-22.58% |
$627,135 |
|
3 |
23.95% |
$1,587,630 |
|
4 |
26.98% |
$796,337 |
|
4 |
10.84% |
$1,759,729 |
|
5 |
11.20% |
$885,526 |
|
5 |
2.05% |
$1,795,803 |
|
6 |
4.80% |
$928,032 |
|
6 |
12.96% |
$2,028,539 |
|
7 |
16.80% |
$1,083,941 |
|
7 |
22.65% |
$2,488,003 |
|
8 |
5.12% |
$1,139,439 |
|
8 |
12.24% |
$2,792,414 |
|
9 |
-35.00% |
$740,635 |
|
9 |
3.53% |
$2,890,987 |
|
10 |
12.48% |
$833,066 |
|
10 |
14.82% |
$3,319,431 |
|
11 |
14.08% |
$950,362 |
|
11 |
27.31% |
$4,225,967 |
|
12 |
3.16% |
$980,394 |
|
12 |
-36.46% |
$2,685,180 |
|
13 |
17.53% |
$1,152,257 |
|
13 |
4.93% |
$2,817,532 |
|
14 |
28.25% |
$1,477,769 |
|
14 |
16.97% |
$3,295,667 |
|
15 |
17.36% |
$1,734,310 |
|
15 |
3.72% |
$3,418,266 |
|
16 |
-1.56% |
$1,707,254 |
|
16 |
11.55% |
$3,813,076 |
|
17 |
13.28% |
$1,933,978 |
|
17 |
28.21% |
$4,888,745 |
|
18 |
22.96% |
$2,378,019 |
|
18 |
-19.56% |
$3,932,506 |
|
19 |
-5.68% |
$2,242,948 |
|
19 |
-12.47% |
$3,442,123 |
|
20 |
32.90% |
$2,980,878 |
|
20 |
-13.40% |
$2,980,878 |
|
|
5.61% |
|
|
|
|
5.61% |
|
The table below shows these same two portfolios with a retirement distribution of $50,000 increased 2% annually to mimic an offset of inflation. Scenario #1 runs out of money, scenario #2 has a balance of over $1.5 million after 20 years. Which scenario do you prefer?
20 Year Average Annualized Rate of Return w/ Income Distribution |
|||||||||
Scenario #1 |
|
|
Scenario #2 |
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|
|
||||||||
Year |
Return |
Income |
$1,000,000 |
|
Year |
Return |
Income |
$1,000,000 |
|
1 |
-8.20% |
$50,000 |
$868,000 |
|
1 |
32.43% |
$50,000 |
$1,274,300 |
|
2 |
-11.76% |
$51,000 |
$714,923 |
|
2 |
-3.28% |
$51,000 |
$1,181,503 |
|
3 |
-22.58% |
$52,020 |
$501,474 |
|
3 |
23.95% |
$52,020 |
$1,412,453 |
|
4 |
26.98% |
$53,060 |
$583,711 |
|
4 |
10.84% |
$53,060 |
$1,512,502 |
|
5 |
11.20% |
$54,122 |
$594,965 |
|
5 |
2.05% |
$54,122 |
$1,489,387 |
|
6 |
4.80% |
$55,204 |
$568,319 |
|
6 |
12.96% |
$55,204 |
$1,627,208 |
|
7 |
16.80% |
$56,308 |
$607,488 |
|
7 |
22.65% |
$56,308 |
$1,939,462 |
|
8 |
5.12% |
$57,434 |
$581,158 |
|
8 |
12.24% |
$57,434 |
$2,119,324 |
|
9 |
-35.00% |
$58,583 |
$319,169 |
|
9 |
3.53% |
$58,583 |
$2,135,553 |
|
10 |
12.48% |
$59,755 |
$299,247 |
|
10 |
14.82% |
$59,755 |
$2,392,287 |
|
11 |
14.08% |
$60,950 |
$280,431 |
|
11 |
27.31% |
$60,950 |
$2,984,671 |
|
12 |
3.16% |
$62,169 |
$227,124 |
|
12 |
-36.46% |
$62,169 |
$1,834,291 |
|
13 |
17.53% |
$63,412 |
$203,527 |
|
13 |
4.93% |
$63,412 |
$1,861,292 |
|
14 |
28.25% |
$64,680 |
$196,343 |
|
14 |
16.97% |
$64,680 |
$2,112,472 |
|
15 |
17.36% |
$65,974 |
$164,454 |
|
15 |
3.72% |
$65,974 |
$2,125,082 |
|
16 |
-1.56% |
$67,293 |
$94,596 |
|
16 |
11.55% |
$67,293 |
$2,303,236 |
|
17 |
13.28% |
$68,639 |
$38,519 |
|
17 |
28.21% |
$68,639 |
$2,884,340 |
|
18 |
22.96% |
$70,012 |
-$22,650 |
|
18 |
-19.56% |
$70,012 |
$2,250,151 |
|
19 |
-5.68% |
$71,412 |
-$94,062 |
|
19 |
-12.47% |
$71,412 |
$1,898,145 |
|
20 |
32.90% |
$72,841 |
-$166,902 |
|
|
20 |
-13.40% |
$72,841 |
$1,570,953 |
If your portfolio was Scenario #1 and you retired at age 65, you were OUT OF MONEY at approximately age 82. This is an example of how SoRW can impact your retirement.
How to avoid Scenario #1?
By being flexible with spending and distributions and incorporating a combination of income and investment strategies, you have a good chance of avoiding Scenario #1. A Bucket Strategy combined with proper Adjustments of your Spending, Withdrawals, and Investments, as well as maintaining and annually updating a financial plan, including Monte Carlo analysis, helps us guide our clients to make smart decisions throughout retirement.
This is a hypothetical example and is not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.
All investing involves risk including loss of principal. No strategy assures success or protects against loss.