POSTED BY PETER WOUTERS
Some rules of thumb and long held assumptions may work well while you are saving for retirement. Holding on to them when you are spending those savings during retirement, may become toxic to your financial health. The myth is that you’ll have enough money to last through retirement as long as the average rate of return matches your plan.
Retirement Myth #7: Your money will last as long as the average rate of return is good.
Averages can be very misleading when applied to rates of return during decumulation or spending periods. You need to pay attention to the pattern of returns that make up the average rates over time. The patterns can dramatically impact the size of your assets when you are withdrawing money to provide yourself an income to meet expenses, especially in the early years of retirement. You eat into your retirement nest egg when:
- you need to withdraw money and the markets are down, or
- what you take out is more than what your investment is earning
It becomes very difficult to rebuild your savings pool because you have to make up for the lower rate of return in a given year and account for the money you spent that is no longer invested. Negative rates of return in the early years of spending can dramatically reduce how much money you will have left 10, 15 or 20 years down the road. This is the case even if the long term average rate of return matches your plan. You see, it’s not just about average rates of return; it’s about the sequence of returns that make up the average. Starting with a low or negative return has the potential to permanently upset your plans and how long your money will last.
©2020 by Peter a Wouters. republished with permission by Peter Wouters. For the complete list of articles, please visit here.
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