I recently encountered an article from the Early Retirement Now blog, discussing just how much sequence of returns risk matters in retirement. The article isn’t new (May 2017). And it’s pretty math-heavy. But it’s worth a read.
One noteworthy finding: over a 30-year retirement, only 31% of the variation in safe withdrawal rates is explained by the average return earned by the portfolio over that 30-year period. 64%, however, is explained by the sequence of those returns.
If the math intimidates you, I would still encourage you to at least click over to the article and find the second table — the one with a column of green-highlighted cells. What these cells are showing you is how important each 5-year window of returns is in determining safe withdrawal rate.
It’s quite striking how much less important each 5-year window of returns is, relative to the prior 5-year window. For example, years 0-5 explain more than 28% of the variation in safe withdrawal rate. Years 5-10 explain another 19%. Years 10-15 explain another 13%. And so on.
Key takeaway being: the returns that your portfolio earns in the first several years of retirement matter a lot.
- More Thoughts on Sequence of Return Risk from Early Retirement Now
Other Recommended Reading
- 10 Ways Advisors Can Differentiate Their Practices from Allan Roth
- How Scarcity Impacts Decision-Making from Meghaan Lurtz
- When Is Guardianship Necessary? from Howard Krooks
- Retirement Planning Lessons from 2018 from Dirk Cotton
- How a New Kind of Community is Creating a Better Aging Experience from Joseph Coughlin
- You Should Freeze Your Child’s Credit. It’s Not Hard. Here’s How. from Ron Lieber
- What Should You Do About a Falling Stock Market? Nothing from Neil Irwin
- 1 Woman, 12 Months, 52 Places from Jada Yuan
Thanks for reading, and Happy New Year!
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