Investments Act Differently Accumulation and Distribution

You are 65 and the time has come to retire. You have saved and invested over the years and now have a big bag of money that you have invested in the market.

Your only income will be your social security and what you take from your big bag of money. You are going to need to take from your big bag of money to have enough income each month to meet your expenses and live the retirement life you want to live. The big question is, “Do you have to worry about running out of money?”

As long as your money is in the market, there are no guarantees of results. Your investments will go up and they will go down. So does it matter when the down years occur? How different will the final result be if losses occur early in the period? What happens if the losses occur later?

Let’s look at an example of the accumulation phase. You have $100,000 invested and you are neither adding to it or taking from it. The graph shows real data from 1973 to 1995 a 22 year period. The account averaged about a 10.1% annualized gain over the 22 year period. The market is going to go up and the market is going to go down. Does it matter when the down years occur? Will losses hurt the portfolio more if they occur near the beginning of the 22 year period? Or will they hurt more if they occur near the end of the period?

The answer is it does not matter. The orange line on the graph shows the actual data from 73 to 95. The black line takes the data and flips it, so that years 1, 2, and 3 are actually years 22, 21, 20 and so on. The graph shows that it does not matter. You come out with the same amount $846,443.

Now let’s look at the distribution phase and see if it works the same way. This time, let’s start with $500,000. We need to withdraw $25,000 for our retirement income. Let’s increase that by 3% each year to cover inflation. Now assume losses of -15% the first year, -10% the second year, -5% the third year, and then gains of about 6% for the next 27 years. Then we are going to start with gains of about 6% for the first 27 years and then show losses of -15%, -10%, and in year 30, -5%.

Do you think the graph look the same as the one for accumulation? Let’s see.

The orange line has the losses at the end of the thirty year period. After 30 years you still have over a $100,000.

Now look at the black line, the early losses. You run out of money in about 16 years! So your big bag of money acts differently when you are taking income out of it. It does matter when the loses occur. Losses in the early years of retirement can wreck your carefree retirement. Actually your big bag of money would last more than 16 years. Because about year 7 or 8, you will realize you are going to run out of money. You will start cutting back your lifestyle so that your money will last longer. You will start worrying that you will out live your money.

Financial simulations can tell you that you have a 90% or 95% chance of not running out of money, but they cannot guarantee it. If you get caught needing money for your retirement when the market goes into a correction, it can wreck your retirement.

You should have all of the money you need each month coming in on a guaranteed basis, so that no matter what happens to the market, you do not have to worry. You have all the money you need each month to accomplish all your retirement goals and enjoy your life.

One of the first steps is to choose a path today, that will allow you to accomplish your retirement goals and enjoy your life. Then put it in writing. You should take the time to put together a written financial retirement plan that deals with your income and the problems that could occur to knock you off your path. You should decide in advance how you will deal those problems if they occur. This will help you to have a carefree retirement.