3244 Brookside Rd 
Suite 140 
Stockton, CA 95219

Retirement Read Time: 3 min

Systematic Withdrawals in Retirement

Many of us grew up with the concept that making regular, periodic contributions to our retirement account was a sound investment strategy. The idea was that, in a fluctuating market, regularly investing a set amount would enable an individual to buy more shares when prices were low and fewer shares when prices were high.1

Does this mean that taking regular, periodic withdrawals during retirement makes similar good sense?

Actually, it can be quite problematic.

Systematic withdrawals do the precise opposite of systematic investments by selling fewer shares when the price is high and more shares when the price is low. This, in effect, reduces the number of shares that may be able to participate in any subsequent market recovery.

Here's an example.

In the accumulation phase, if a portfolio falls by 25%, it will require approximately a 33% return to get back to its pre-decline value.²

In the distribution phase, if you withdraw 5% of your portfolio for income and suffer the same 25% market decline, you would need to see a 43% market rebound to get back to pre-decline value.²

Sequence of Returns

In the accumulation phase, investors tend to focus on average annual rates of return and less on the sequence of the returns. If you're a buy-and-hold investor, ignoring short-term fluctuations may be a sound long-term approach.

If you are in retirement, however, you absolutely care about the sequence of the annual returns.

For instance, comparable portfolios might deliver the same average annual return over a 20- or 30-year period, but they could have radically different outcomes in terms of account balance and income production. Generally speaking, negative returns in the early years of your retirement can potentially reduce how long your assets can be expected to last.

American writer H.L. Mencken once remarked that "For every complex problem, there is an answer that is clear, simple, and wrong."

Anticipating a lifetime of withdrawals from a defined asset pool over an indefinite period of time is a complex challenge for which there is no simple solution. Pursuing this challenge can require creative approaches and persistent vigilance.

1. Dollar-cost averaging does not protect against a loss in a declining market or guarantee a profit in a rising market. Dollar-cost averaging is the process of investing a fixed amount of money in an investment vehicle at regular intervals, usually monthly, for an extended period of time regardless of price. Investors should evaluate their financial ability to continue making purchases through periods of declining and rising prices. The return and principal value of stock prices will fluctuate as market conditions change. Shares, when sold, may be worth more or less than their original cost.
2. This is a hypothetical example used for illustrative purposes only. It is not representative of any specific investment or combination of investments.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright FMG Suite.

 

Related Content

Federal Income Tax

Federal Income Tax

Use this calculator to estimate your income tax liability along with average and marginal tax rates.

Split Annuity Strategy

Split Annuity Strategy

Here's one strategy that combines two different annuities to generate income and rebuild principal.

The Cycle of Investing

The Cycle of Investing

Understanding the cycle of investing may help you avoid easy pitfalls.

 

Have A Question About This Topic?







Thank you! Oops!

The Five Basics of Financial Literacy

How literate are you when it comes to your finances? Brush up with these five basics.

Will Power

Preparing for the eventual distribution of your assets may not sound enticing. But a will puts the power in your hands.

Asset Allocation

Consider how your assets are allocated and if that allocation is consistent with your time frame and risk tolerance.

View all articles

Comparing Investments

This calculator compares the net gain of a taxable investment versus a tax-favored one.

Assess Your Life Insurance Needs

This calculator estimates how much life insurance you would need to meet your family's needs if you were to die prematurely.

What Is My Life Expectancy?

Estimate how many years you may need retirement assets or how long to provide income to a surviving spouse or children.

View all calculators

Your Cash Flow Statement

A presentation about managing money: using it, saving it, and even getting credit.

Managing Your Lifestyle

Using smart management to get more of what you want and free up assets to invest.

5 Smart Investing Strategies

There are some smart strategies that may help you pursue your investment objectives

View all presentations

Stay Safe with a B.O.P. At Your Back

Learn about the advantages of Business Owner Policies with this highly educational and fun animated video.

Should You Ever Retire?

A growing number of Americans are pushing back the age at which they plan to retire. Or deciding not to retire at all.

Retirement Redefined

Around the country, attitudes about retirement are shifting.

View all videos