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Retirement: Sequence of returns matters  Thumbnail

Retirement: Sequence of returns matters

At retirement, we all want to know that we’ll have enough money to meet our needs for the rest of our lives. That’s the goal—to have no money worries at retirement, no matter what life throws at us. But we know that life is often full of surprises. 

What if you get sick and need care at home? Is that a fair burden for your spouse? Do you have a spouse? What if one of your adult children has a financial crisis? 

These are life-event risks. What about unexpected turns of the financial markets? If the stock market declines, will you still have enough? 

Retirement on the back of an envelope

Many people will do basic planning that involves determining how much they need to live on and multiplying that by the number of years between now and their expected date of death. 

So, let’s say you have $3 million set aside in investments. If you are age 65 and need $150,000 / year to live on and expect to live until 85, you’re set, right? 

No. You’d need over $3.8 million because the cost of everything goes up over time (e.g., inflation). And, we haven’t even considered taxes.[1] 

If you don’t have $3.8 million, you’ll need to invest your money wisely and hope it grows enough to offset inflation. 

What about stock market returns? 

With spreadsheets we can project how much you’ll need, using an average rate of return. For example, to cover lifestyle expenses of $150,000 / year today for the next 20 years, how much do you need today?[2]–About $2 million. However, this assumes that you earn 4% every year. We know that some years you’ll earn more and some years less, but on average 4% seems like a reasonable rate of return. 


It all depends on when you earn the returns. 

Retirement returns: Two great years at the beginning; two flat years at the end. 

Let’s assume that you retire and your investments get off to a great start, earning 20% in the first two years and 0% for the last two. In between you earn 4% per year. If you start with $1.9 million and need $150,000 each year, you’ll have just enough to make it through until age 85. 

Retirement returns: Two flat years at the beginning; two great years at the end. 

Now let’s consider the opposite. Let’s assume that you retire and the market is flat. You earn 0% the first two years but end your last two years with 20% for both years. Well, it doesn’t matter that the markets earned a lot at the end because you ran out of money half way through the 14th year of retirement. That’s a shortfall of 5.5 years just because the sequence of market returns was flipped

Remember, that’s starting with two 0% years; if we had included two years of negative returns, you’d have run out of money even sooner. 

Planning for retirement can be tricky. Let’s not pretend everything’s going to be okay. Plan now so that you can relax and enjoy that time with your family and friends. 

Give us a call. We’re here to help. 

Lyman H. Jackson



All returns and calculations are hypothetical. Your returns will vary with market and portfolio performance. Past performance is no guarantee of future results. 

Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. FPS provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client after entering into an advisory relationship. Information herein includes opinions and forward-looking statements that may not come to pass. Information is derived from sources believed to be reliable. Information is at a point in time and subject to change without notice. Such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.

[1] We also did not include Social Security income either, just to keep things simple.

[2] Assumes an inflation-adjusted return of 4%; taxes are not included.

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