We already discussed the sequence of returns risk, also sometimes known as “Reverse Dollar Cost Averaging.”
We also discussed how market volatility may increase as demographic risks and increasing numbers of sellers push into a market with few buyers.
But assume you still want to blindly follow the herd and are going into retirement with a portfolio of stocks and bonds invested in the market, and want to know how much money you can take out each year.
(Incidentally, this scary advice that ignores all the crippling risks detailed herein is what most money managers and mainstream financial talking heads will serve up to you… use are your own peril…..)
Why Discuss Systematic Withdrawal Rate Risk?
The reason we talk about withdrawals as a risk is that there is no consensus on what is ‘safe’, and furthermore, all these ‘safe’ assumptions still assume that you should be ok with a probability of failure.
I disagree with the failure part, but will come back to solutions later. We’re focusing on problems now to get it out of the way.
Below is a visual representation of the effect of timing on your portfolio- this chart uses actual historical data for treasury bills and the S&P 500, and a 5% withdrawal rate. You would think that 9.6% annual compounded growth, and a 5% withdrawal rate, would not affect your portfolio.
But in reality, the portfolio is depleted by 1993, assuming a retirement start date of 1973.
If you run the same scenario for retirement starting in 1990, the portfolio is healthy and strong… The reason this one failed is because it started off in bad years, and withdrew too much.
This is a combination of unsustainable withdrawal rate and sequence of returns risks coming together… now I don’t know about you, but I think that we are in a series of bad years right now and for the foreseeable future in the markets.
I do not think that sustained double-digit or even high single-digit rates of return are reasonable expectations.
Sequence of Returns Risks In Retirement
Sequence of returns risks and portfolio volatility in retirement is a portfolio killer.
Withdrawal Rate: How Long Does A Portfolio Last?
- Can A Fluctuating Portfolio Sustain Withdrawals?
- Stocks Fluctuate
- Withdrawals Do Not…
- Being Invested = Gains… Maybe…
- But Selling While Down = Drain
Systematic Withdrawal Rate Risk Summary
The language of portfolio management is really dry, and doesn’t give you the emotional sense needed to understand the risk.
Come on- Traditional money managers blather on about withdrawal rates and portfolio sustaining investments, then when you ask then a simple question like ‘will I have enough to last my whole life”, they answer with dodgy garbage like ‘monte carlo simulations’ and ‘probability of ruin.’
Excuse me, but the probability here is your life.. And ruin means being broke.
That, my friend, is too important a task to entrust to the Monte Carlo school of gambling investment management!!
Systematic Withdrawal Rate Risk Conclusion:
Mitigate longevity risk (risk of outliving your money) and sequence of return risks (hitting a bad year early on and needing to sell when you are down) and mitigate the risk of overspending (systematic withdrawal rate risk) by investing in a guaranteed income stream.
Ahem…. Guarantees (Annuities) Mitigate All These Risks!
This table, from a Wall St journal article on withdrawal rate risk, shows how various withdrawals fared in market environments.