The "Fragile Decade" of Your Retirement

The "Fragile Decade" of Your Retirement

Some call it the “fragile decade,” that first 10 years of retirement when market movements can have a profound effect on a portfolio’s ability to sustain income and financial security for the years ahead.  It has a lot to do with the sequencing of returns. 

In the years leading up to retirement, many investors have discretionary income to make meaningful contributions to retirement savings, and they’re not yet drawing from those nest eggs.  If markets are down, they’re buying in at lower prices with better upside prospects ahead.  But once that employment income must be replaced, at least in part, by withdrawals from retirement savings, the impact of a significant market downturn can be magnified.

Suppose one starts retirement with a diversified, million-dollar portfolio and initiates 4% annual withdrawals.  If in the first year of retirement the portfolio suffers a 10% market-driven decline, and then a 5% decline in year two, those withdrawals will trim that $1,000,000 portfolio down to about $780,000.

At that level, $40,000 represents a more aggressive 5.1% withdrawal rate. Even a 15% bounce-back performance for the underlying investment holdings in year three will only restore the portfolio to about $850,000 net of those ongoing withdrawals.

The foregoing is hardly a disaster scenario.  Yet the odds of a diversified portfolio supporting that $40,000 annual withdrawal have dropped a few percentage points, as indicated in the accompanying table. If the decline is severe enough to make that $40,000 a 6% distribution rate, the 30-year sustainability odds drop all the way to 69%.

Fortunately there are strategies to guard against an unlucky sequence of returns in the fragile decade.  That’s a discussion to be had and regularly revisited with your investment professional.


Take Action:  Are you on track for retirement? Have you stress tested your retirement projections to assess your own likelihood of sustaining income for 30+ years?  This article talked about variability of investment returns, but there is also inflation to consider. Mallery Financial is offering a free retirement readiness analysis, which includes a stress testing function that shows your overall probability of success based on your retirement savings and projected expenses. Click here to get your report.

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