On Guard for the Fragile Decade

Some call it the “fragile decade,” that first 10 years of retirement when market movements can have a profound effect on a portfolio’s ability to sustain income and financial security for the years ahead.  It has a lot to do with the sequencing of returns.

In the years leading up to retirement, many investors have discretionary income to make meaningful contributions to retirement savings, and they’re not yet drawing from those nest eggs.  If markets are down, they’re buying in at lower prices with better upside prospects ahead.  But once that employment income must be replaced, at least in part, by withdrawals from retirement savings, the impact of a significant market downturn can be magnified.

Suppose one starts retirement with a diversified, million-dollar portfolio and initiates 4% annual withdrawals.  If in the first year of retirement the portfolio suffers a 10% market-driven decline, and then a 5% decline in year two, those withdrawals will trim that $1,000,000 portfolio down to about $780,000.

At that level, $40,000 represents a more aggressive 5.1% withdrawal rate. Even a 15% bounce-back performance for the underlying investment holdings in year three will only restore the portfolio to about $850,000 net of those ongoing withdrawals.

Sustainability of Income
For a Portfolio 
Diversified as Follows:        At a withdrawal rates of:
24% U.S. Stocks                           3%       4%      5%      6%

24% Internat’l Stocks

24% U.S. Bonds                        Chances of sustaining

20% Global Bonds                    income for 30+ years is…

5% Cash                                       95%      95%     92%     69%

Asset class indexes: Cash: 90-Day U.S. Treasury; U.S. Stocks: S&P 500 Index; U.S. Bonds: Ibboston U.S. Long-Term Corp. Bond Index; Internat’l Stocks: MSCI EAFE Index2; Global  Bonds: Citigroup World Government Bond Index

Source: Franklin Templeton Investments


The foregoing is hardly a disaster scenario.  Yet the odds of a diversified portfolio supporting that $40,000 annual withdrawal have dropped a few percentage points, as indicated in the accompanying table. If the decline is severe enough to make that $40,000 a 6% distribution rate, the 30-year sustainability odds drop all the way to 69%.

For those in or nearing retirement, talking with an advisor about your anticipated distributions is an important discussion to be had and regularly revisited.

Barry Nelson

A little more about Capital Financial Planners...

Established in 1984, Capital Financial Planners, LLC is an independent, fee-based investment management and financial planning firm located in Salem, Oregon. We provide wealth management and advisory services to clients in the Pacific Northwest and beyond. Our services include retirement planning, investment management, advisory services for trustees, hourly financial planning and more. We take a holistic and collaborative approach, working not only as our clients’ financial advisors, but as their financial partners.

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