Sequence of Returns and Income in Retirement

When it comes to planning for retirement, your view should be long-term because it is unknown as to how long your retirement years will be. You should explore financial products that can provide income for your lifetime and that of your spouse’s lifetime. In addition, a portion of your income should be independent from and not reliant on market performance. Finishing confident is just as important as beginning confident.

Up 7%, Up 27%, and Down 13%

A June 2011 report titled Retirement Income — Ensuring Income throughout Retirement Requires Difficult Choices from the U.S. Government Accountability Office (GAO) to the Chairman, Special Committee on Aging, U.S. Senate, examined sources of retirement income and risks, such as the sequence of returns. In the report the above noted annual rate of returns were used to demonstrate the risk about sequence of returns. If you experience these returns in any order, the average annual rate would equal 7%. Meaning, it doesn't matter in which year you would experience any one of these returns, the average result would always be the same. But when it comes time to take income, the sequence of returns throughout the portfolio’s life will make your experience be quite different. If the portfolio experienced these returns as up 7%, up 27% and down 13% (repeating this order throughout your retirement), and you start to withdraw as income each year a fixed 9% of the first year’s balance of the portfolio, your assets would last for 24 years.

Up 7%, Down 13%, and Up 27%

However, if these returns were up 7%, down 13% and up 27% (repeating this order throughout your retirement) and

withdrawing the same fixed 9% each year, your assets would last for 18 years. Each case had the same average rate of return but the sequence of returns was different, which resulted with the first experience being able to provide an additional 6 years to the life of these assets. The GAO report can be found on the agency’s public Web site at www.gao.gov.

Create Your Plan Today

Here are some action steps you can take today to prepare

for retirement:

• Work with a financial professional to fully explore your options for developing your income plan for retirement.

• Understand how your lifetime sources of income work, like Social Security, and explore possible ways to increase these sources.

• Compare your retirement income with the total amount of your expenses — necessary expenses and comfort-living

expenses — to see if you have a retirement income gap.

• Purchase financial products that can provide guaranteed payments for life or for the life of the surviving spouse, and that can provide protection for unexpected events.

• Follow a distribution/withdrawal plan by accessing pools of assets at certain points in time during retirement. This can help you lengthen the life of your assets, gain the potential benefit of compounding growth and systematically increase your retirement income when you need it most. A financial professional can be one of your best allies when it comes to retirement planning. A financial professional can help you develop a comprehensive, holistic plan that addresses all of your goals and needs—and takes care of the people in your life who are important to you.