“Time is on my side, yes it is. Time is on my side, yes it is.” — The Rolling Stones, 1964
For those of us who remember when this Rolling Stone’s hit song played on our transistor radios, time was indeed on our side. We felt we would live forever and change the world for the better.
We can argue about our success in making the world a better place but we’re now pretty much convinced we are not going to live forever. And while we had plenty of time to recoup any losses that our investments sustained when we were younger, it’s important to understand how time horizons and volatility can affect our retirement plan in a potentially negative way.
Table A below shows that Large-Company Stocks had a 9.8% average rate of return from 1926 to 2012. But year to year returns fluctuated significantly with the best year returning 54% return while the worst year lost 43.3%.
Table B below shows how volatility can create havoc on a retirement portfolio. Assume that a 65-year old has $1,000,000 of assets and 4% of the portfolio is used to fund retirement initially with 3% annual increases for inflation. After the first year’s return of -43.3%, assume returns alternate between +20% and -10% annually.
Table B above shows that the poor investment return from the first year (-43.30%) has negatively affected the principal to the point that the annual 4% withdrawals are overwhelming the Investment Returns in the later years. In 16 years, this retiree is out of money!
While it is unlikely that one will retire in the year where the largest decline in 86 years occurred, understanding how starting retirement in “down” years such as 2000 or 2008 can significantly affect the success of your retirement is an important part of planning for retirement.
“Plan for the worst … Hope for the best” is an important maxim for retirement since there are no “do-overs.”
Please call me at (610) 999-3599 or click here to learn more about how poor investment returns in the early years of retirement can lead to running out of money.