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Health & Fitness

Average Rate of Return and Sequence of Return

In retirement, the sequence of returns can have a large impact on your financial well-being.

Most of us in the accumulation phase of retirement planning are concerned with the average rate of return on our investments. We systematically put a certain amount of money away and try to get the highest rate of return for a given tolerance for risk. If, over a twenty year period, your average rate of return is, say 9 percent, you may never have actually earned 9 percent in any single year. In some years you lose money and some years you make money with your investments. The sequence of returns doesn’t matter much when you are accumulating wealth, although large losses immediately prior to retirement can hurt. The same cannot be said when you are retired and systematically withdrawing from your investments. 

 When you are living off of your investments, or drawing down your portfolio, the sequence of returns can be extremely important. If, over your 20-30 year retirement, your average rate of return is 9%, the sequence of returns can have a dramatic effect on the longevity of your investment portfolio. If you know someone who retired in 2006 or 2007, and who suffered dramatic portfolio losses in the first few years, then you may have seen the effects of early losses and how that will change the longevity of their portfolio. You may be taking 4 or 5 percent of your assets to live on, and if your asset base declines by 20 percent the first year, your income will drop in the second year by a large amount.

 Growing your asset base and spending down your asset base require different strategies to fulfill your long term goals. Early large losses in the spending down phase in retirement can be detrimental to your long term goal of living a comfortable lifestyle for your entire life. Of course, losses may happen and there are many events beyond our control. Working with a professional can help you to manage the risks associated with retirement income planning and market volatility.

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 By: Joe Arndt  Pres. Arndt & Associates 8124 Big Bend Blvd. St. Louis, MO  63119 314-968-5467. Securities and Investment Advisory services offered through Sagepoint Financial, Inc., member FINRA/SIPC and a registered investment advisor.

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