Contributed by: Angela Palacios, CFP®
When planning for our goals, we often think in terms of “What return will we average over time?” But does it matter what pattern these returns happen in? What if they are choppy or we experience very negative returns right before we need the money or as we are drawing it? The answer can be startlingly different depending on what phase of your goal you are in.
If you are accumulating for a future goal the sequence of how to help achieve your returns in general doesn’t matter as long as you average what you need at the end. Look at the following example:
Source: Blackrock
The chart below shows two 30-year income scenarios. The solid line shows a withdrawal plan that started off with three years of negative returns in a row. The dotted line represents a withdrawal plan with the negative years at the end. Both plans started with $250,000 and both took out $12,500 per year inflated by 3% for inflation. No other actions were taken to manage income withdrawals. Both plans had a 6.6% average annual rate of return on the underlying investment for the 30-year period.
These nuances are why it is critical to work with a financial planner to plan for and pursue your goals!
Angela Palacios, CFP® is the Director of Investments at Center for Financial Planning, Inc.® Angela specializes in Investment and Macro economic research. She is a frequent contributor The Center blog.
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