The Horseman of Sequence of Returns

Mary accumulated a nice nest egg, planned carefully, and began a reasonable withdrawal rate from her retirement savings.  You may ask, what’s a reasonable rate? Recent Barrons article here for that discussion, and we’ll say 4%?  Mary was also fortunate about the time she chose to retire.  She began retirement during a bull market and enjoyed positive returns for more than 10 years following her retirement.    We will say she retired in 2012, with a portfolio of 60% stocks and 40% bonds, and enjoyed a 15% return on her stocks and 2.5% on her bonds for a blended return of 10%.  WARNING! Back down math nerds and investment historians. These are approximations of returns Mary might have experienced.  They are not intended to provide exact math on the above.  This is just to illustrate the impact of sequence of returns.

Bob was less fortunate.  He also planned well and accumulated a healthy nest egg and began withdrawing as Mary did – but the timing of when he made the withdrawals was not as fortunate.  He began in January 2001, and by the end of 2010 his stock returns were essentially flat (even with dividends), though his bonds did better, at say 4%.   With the same 60/40 stock bond portfolio, his return was about 1.6% for the decade… and all the while he was taking out 4% each year.  With inflation and a nearly flat growth rate of his assets, he depleted over 1/3 of his nest egg in the first decade.  (Again, these are approximations for illustration.)

But it gets worse. Had Bob retired just 10 months earlier, on March 24^th of 2000, at the S&P’s peak, he might have seen his stock portion drop by 47% before recovering (or a 28% loss in a 60/40 portfolio).  (Approximations again.)