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The Stunning Problem With The 4% Retirement Income Rule In One Chart
What do you notice in this third scenario? A lot more red. Again, the average annual return is the same across all three scenarios (5.50%), but look at what happens. You run out of money in year 15. How is that possible?

The reason is that when your portfolio experienced negative returns early on, it was never able to recover even with the high returns later on. Basically, your portfolio got stuck in a hole, and with the $40,000 withdrawals each year, it was too little and too late. This is obviously not the outcome you want in retirement.

Are there strategies to help mitigate this risk? Yes, but the lesson here is to recognize that the order of investment returns matters a great deal in retirement. Creating a safe retirement income distribution plan is not as simple as following the 4% rule. This is why Nobel Prize winner, William Sharpe, said retirement income planning is “The hardest and nastiest problem in finance.” While it may not be simple or easy, it is imperative if you want a lifetime stream of income.

In upcoming Forbes articles, I will discuss several strategies to reduce the sequence of returns risk.
retirement  pension  returns  drawdown 
9 weeks ago by fallond

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