Actually, it can be quite problematic.
Systematic withdrawals do the precise opposite of systematic investments by selling fewer shares when the price is high and more shares when the price is low. This, in effect, reduces the number of shares that may be able to participate in any subsequent market recovery.
Here’s an example.
In the accumulation phase, if a portfolio falls by 25%, it will require approximately a 33% return to get back to its pre-decline value.²
In the distribution phase, if you withdraw 5% of your portfolio for income and suffer the same 10% market decline, you would need to see an 18% market rebound to get back to pre-decline value.²
Sequence of Returns
In the accumulation phase, investors tend to focus on average annual rates of return, less on the sequence of the returns. If you’re a buy-and-hold investor, ignoring short-term fluctuations may be a sound long-term approach.
If you are in retirement, however, you absolutely care about the sequence of the annual returns.
For instance, comparable portfolios might deliver the same average annual return over a 20- or 30-year period, but have radically different consequences to how long your savings may last. Generally speaking, negative returns in the early years of your retirement can potentially reduce how long your assets can be expected to last.
American writer H.L. Mencken once remarked that, “For every complex problem there is an answer that is clear, simple, and wrong.”³
Anticipating a lifetime of withdrawals from a defined asset pool over an indefinite period of time is a complex challenge for which there is no simple solution. Pursuing this challenge can require creative approaches and persistent vigilance.
- Dollar-cost averaging does not protect against a loss in a declining market or guarantee a profit in rising market. Dollar-cost averaging is the process of investing a fixed amount of money in an investment vehicle at regular intervals, usually monthly, for an extended period of time regardless of price. Investors should evaluate their financial ability to continue making purchases through periods of declining and rising prices. The return and principal value of stock prices will fluctuate as market conditions change. Shares, when sold, may be worth more or less than their original cost.
- This is a hypothetical example used for illustrative purposes only. It is not representative of any specific investment or combination of investments.
- BrainyQuote, June 2013
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2013 FMG Suite.