Okay, here we put the all Accumulation and Distribution/Withdrawal aspects of these examples together into two charts.
Chart I – This reflects the two Accumulation scenarios from Figures A and B – both started with the exact same amount and had the exact same hypothetical Average Rate of Return over 25 years. However, as you recall, the sequence of the estimated Annual Rates of Return was flipped into reverse order for one scenario vs the other. Please notice again both the wide differences in value between the two scenarios during the 25 years in question before they converged back towards the same hypothetical value of $298,297.86.
Chart II - This reflects these four Distribution scenarios from Figures C, D, E, and F – These also started with the exact same amount and used the exact same sequence of returns as used in the Accumulation examples and were also flipped in the same manner for alternative scenarios. Additionally, they also added in systematic withdrawals both with and without inflation factored in. As you will note, the experiences of each scenario are quite different from each other.
One of the biggest obstacles many people who have had both good and bad experiences with saving in the past is the lack of appreciation of the effect that withdrawing from their savings can have on their balances over time – even more so with inflation factored in.
As you can see, if the Annual Rates of Return goes against you early enough when you start taking out money to live on, your systematic withdrawal program may be adversely affected, regardless of what your assumed Average Rate of Return for a given period of time might have been in the past or what you might have expected it to be in the future.
The process of Accumulation vs the process of Distribution is different, because the effects of Annual Rates of Return are different when you are withdrawing funds to live on. Make sense? Since the past is not a guarantee of the future, you really have no idea what your savings or investments may bring into the future over an extended period of time, what inflation will be, nor how long you will live. In other words, your past experiences may not be the same as your future experiences because of factors outside of your control. And that’s a risk you should be aware of.
So, where do you go from here?
Hopefully you try to account for this risk in your ongoing retirement planning process. If you haven’t, you may wish to have a conversation with Tim to discuss how he may be of service to help you understand your options. An initial appointment is always complimentary.
In the meantime, we hope that these examples have proven helpful to you in understanding Systematic Withdrawal (or Distribution) Risk. Please let us know if you have any questions.