The Potential Impact of Picking the Wrong Time to Retire

Let’s consider a hypothetical 60-year-old who retires in 1969 with a $500,000 nest egg (a decent sum back then). He keeps his money in an S&P mutual fund and withdraws $30,000 each year, with 3% yearly increases to adjust for inflation. How would it work out for this retiree?

He would be bankrupt at 86.

Over this 27-year period, there were 21 years where the S&P index moved up, and only 6 down years. Not only that, but the index averaged a 12.2% growth rate over that period (for a discussion of this misleading statistic, see Average Returns vs. Annualized Returns... and Why It's So Important.).

And yet, between this person’s spend down of his retirement nest egg and the market performance, he runs out of money by age 86. This example does not include the effects of taxes and fees on this portfolio, which would make the result significantly worse. And what do you think this gentleman would have been feeling in his 81st year, when he had less than $200,000 left to his name but possibly another 20 years to live?

Now, let’s consider if the S&P index changes were all the same, but reversed. Instead of losing 8.24% in the first year, it happens in the last year. Instead of a 3.56% gain in the second year, it happens in the second-to-last year, and so on. How would this retirement turn out?

Rather than bankruptcy at 86, this retiree has $4.3 million dollars, simply from the different order of the index change!

​Notice the difference in ending balances at the end of the 1st year. It is $228,000. That’s difference represents 45% of the starting amount! By the 2nd year, we’re now comparing a person “starting” with $428,000 to one with $656,000.

For you skeptics and engineers, you might object to the data chosen to illustrate this concept. If we were to run the numbers for any other set of years, the results would differ, and they might not be so drastic.

True, so here is a question you can ask yourself. What will the actual data be that apply to you? If you’re going to retire in 2035, what will the market do to your 401(k), 403(b), or IRA that year? Obviously, you can’t know! We cannot know or control how the market is going to play out over time. But we do know that losses early into or just before retirement can be financially devastating and insurmountable. Looking back, 1969 was a terrible year to retire. 1972 was even worse. 2001 and 2002 were awful, as was 2007-2008, and 2020 might not be so good either. Do you feel lucky?

Would you like to leave your retirement income up to chance, to Sequence of Returns Risk? Or would it be more beneficial to create a strategy that removes the possibility of running out of money before you run out of breath?

Arieff Consulting will show you how to address and overcome this risk.