Something Wicked This Way Comes?

January 28, 2007

I write to you today as an Arctic cold front begins to grip the Midwest in it's clutches. Watching the news last night, the weatherman said it will be the coldest weather since 1994. I hope they are wrong. I don't know if my old Chevy Blazer can take such weather, and I'm pretty sure my old dogs can't. The unpredictability of weather leads me today to discuss the other great unknowable....the returns and in what order you will get those returns, on your investments in retirement. This is not a discussion about the merits of stocks or bonds, but rather, a discussion about the possible sequence of returns that you may receive from your various investments, and how withdrawals might affect your retirement savings. Like Mr. Cooger and the carousel in Ray Bradbury's "Something Wicked This Way Comes", we cannot ride backwards and reclaim lost time. We live in the here and now, and must make good decisions based on what we know now, or our decisions may spin the ride forward.

Now that you are near or in retirement, you will have to make a decision on where and how to invest your hard earned savings - a task made more difficult by the fact that your money will have to last for 20-40 years or more. It seems straightforward: invest in something that matches your risk tolerance with your time horizon to create a careful balance between asset growth and savings protection. What almost no advisor discusses with you is the impact of something that they have absolutely no control over - the sequence of returns you receive in retirement.To understand how important the pattern of returns is, imagine you average an 8% return for the last 25 years. An investment of $30,000 would have grown to $206,049 regardless of your sequence of returns in the accumulation stage. Now taking your $206,049 and beginning withdrawals based on 5% and increasing that amount 3% each year for inflation, the differences are stunning. With poor returns early in retirement, investor A runs out of money in 14 years, having withdrawn $167,334. Investor B who was luckier and retired during a period of great performance, was able to withdraw $375,619 over 25 years, and still have savings of $793,304. Surely I don't need to explain the importance of luck in your timing.

Here is a link to the Manulife site and the actual numbers
https://hermes.manulife.com/Canada/wmInvestmentsPub.nsf/public/GIFSelectIncomePlus_returns

The purpose of today's exercise is not to scare you out, or talk you into investing in the market. Most of your advisors are well meaning folks who do the best for you that they can. It is important though, to see the impact of luck as you enter your golden years, and keep in mind that we've had four straight years of positive performance in the stock markets. We've started this year positive for a fifth........

Something Wicked This Way Comes?

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