• Terry Herr, CFP®, CLU

Retiring? Average returns are useless.

A successful retirement begins and ends with your ability to meet your income needs. In fact, fundamental retirement success means not outliving your income. It is critical to understand what you can and can’t control as well as how the sequence of market returns impact your portfolio.

What can we control?

Deposits & Withdrawals—You are in control of your deposits and withdrawals during retirement. You will need to determine how much income you need to meet basic needs, but you also need to understand the impact of planned and unplanned distributions which is critical in developing a successful strategy. As a retiree, you can change, turn on and off your income streams at will.

Asset Allocation— Asset allocation is not about achieving the highest return. Allocation of your investments are designed to help you reach your goals while trying to reduce the risk of losing value. Your investment allocation should be part of an investment policy statement and investment strategy that is consistent with your preferred level of risk and offers a realistic probability of achieving your goals. You have complete control on you allocate your investments.

What we can’t control

Sequence of Return—The sequence of return is perhaps the least understood investment concept but one of the most important factors impacting your retirement success. Unfortunately, it is a factor that cannot be controlled by you or your advisor. However, some of this uncertainty can be dealt with by using strategies (which we’ll write about at a later date).

During retirement, the interplay between your rate of withdrawal and the sequence of returns will have a dramatic impact on the portfolio’s overall ability to last.

Forget Average Returns

Most investors who are accumulating assets often look to the historical and predicted future average annual returns when selecting and investment. Average annual returns of an investment are no longer relevant once you retire and begin taking retirement income distributions from an account. What is important are the ACTUAL rate of return and the sequence of those returns.

Let’s assume you entered retirement with a total of $1,000,000. You plan to withdraw 6% annually with increases to the withdrawal by 3.5% annually over the next 10 years. We will also assume you have a 6% fixed rate option and 4 possible investment portfolios with the following returns:

When 8% is better than 10%

It is possible for an investment with an average return of 10% to have a lower value than a portfolio with an average return of 8%. Notice the impact negative returns have early in sequence. Early negative returns can adversely affect your end value.

For more information about strategies that can help you increase your probability of success contact us.

Charts are hypothetical and for illustrative purposes only and are not intended to predict or project portfolio results. The sequence of returns in portfolios A to D have a year-to-year volatility consistent with a portfolio predominately comprised of stocks and do not reflect actual market returns. Annual returns have been rounded to the nearest whole number. It is generally not possible to avoid negative returns when investing.

Any opinions expressed in this forum are not the opinion or view of American Portfolios Financial Services, Inc. (APFS) and have not been reviewed by the firm for completeness or accuracy. These opinions are subject to change at any time without notice. Any comments or postings are provided for informational purposes only and do not constitute an offer or a recommendation to buy or sell securities or other financial instruments. Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors. Herr Capital Management does not provide tax advice and this content should not be regarded as individual tax advice. Any links contained are to external websites we believe to be reliable. Herr Capital Management is not responsible for any content or information contained on external websites. Securities offered through American Portfolios Financial Services, Inc.(APFS) Member FINRA /SIPC. Investment Advisory Services offered through Herr Capital Management LLC a Registered Investment Advisor which is not affiliated with APFS.

#longevity #volatility #MarketDecline #retirement

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Securities offered through American Portfolios Financial Services, Inc. Member FINRA/SIPC.  Investment advisory services offered through Herr Capital Management, LLC, a registered investment advisor independent of American Portfolios Financial Services, Inc.