What the New Retiree Needs to Know About Market Performance

What the New Retiree Needs to Know About Market Performance

June 12, 2019

Every 9 seconds an American turns 65 years old. 10,000 people a day are facing retirement, and considering how their savings will last.1 This year, facing a 10-year-old bull market, what would the consequence of a market selloff be to the newly retired?

A serious concern that retirees should consider, is the impact of a down market on their withdrawals. Many investors are used to market fluctuations by now. However, you may not realize the impact of when those fluctuations occur. A down market in the first three years of your withdrawals could have a much greater impact than the same performance occurring at the end of the withdrawal period.

How the Timing of Withdrawals Impacts Your Retirement Savings

When saving for retirement, the return experienced in the early years has little affect compared to growth achieved through regular savings. However, the rates of return just before and after retirement –when wealth is greatest– can have a significant impact on retirement outcomes.

The chart below shows two 30-year income scenarios. The solid line shows a withdrawal plan that started off with three years of negative returns in a row. The dotted line represents a withdrawal plan with the negative years at the end. Both plans started with $250,000 and both took out $12,500 per year inflated by 3% for inflation. No other actions were taken to manage income withdrawals. Both plans had a 6.6% average annual rate of return on the underlying investment for the 30-year period.

Chart source: MFS Research

The Lasting Impact of a Bad Start

The consequences of a bad sequence of returns, especially early in retirement, can mean premature depletion of the portfolio. Retirees need to avoid being in the position of having to sell during inopportune market environments.

Consider the case of two individuals retiring at the same age, and how the market’s returns, when combined with their withdrawals, impacted the value of their retirement savings and how long their savings may last for retirement income. Both individuals started with the same amount of money and withdrew the same amount each year.

Chart source: MFS Research

While there is no way to adequately predict the sequence of returns you will experience during your retirement, you can control the timing of when you sell your assets to support expenses.

Work with a financial advisor who can help thoughtfully develop and manage your retirement income plan. They can create a withdrawal strategy that aims to address sequence of withdrawal risk, as well as other retirement risks like longevity, healthcare expenses, and tax planning.

For more information on other retirement risks, download our free ebook How Retirement Fails here: http://bit.ly/2EWShht

  1. The Washington Post. Baby boomers upend the workforce one last time. (2019, March 01).

Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA / SIPC. Financial planning offered through M Financial Planning Services, a Registered Investment Advisor and a separate entity.

All illustrations are hypothetical and are 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.