Poor returns have the biggest impact on outcomes when wealth is greatest. Using the three sequence of return scenarios illustrated on the prior page – great start/bad end in blue, steadily average in gray and bad start/great end in green – this slide shows outcomes when saving for retirement (top chart) and when spending in retirement (bottom chart). The top chart assumes savings of $10,000 per year. In the early years of saving, the return experience makes very little difference across sequence of return scenarios. The most powerful impact to the portfolio’s value is the savings behavior. However, the sequence of return experienced at the end of the savings journey when wealth is greatest produces very different outcomes by as much as half. The bottom chart shows the impact of withdrawals from a portfolio to fund retirement. If returns are poor early in retirement, the portfolio is “ravaged” because more shares are sold at lower prices, thereby exacerbating the poor returns that the portfolio is experiencing. This results in the portfolio being depleted in 23 years – or 7 years before the 30-year planning horizon. If, instead, a great start occurs at the beginning of retirement and the same spending is assumed, the portfolio value is estimated to be $1.7M after 30 years. 

The key takeaway from these illustrations is the importance of appropriate risk level prior to and just after retirement because that is when wealth is greatest and therefore most at risk.