The Lucky Retiree and the Unlucky Retiree

If you got an average return of 10% per annum over 10 years in your first 10 years of retirement you would be pretty happy wouldn’t you? Well not necessarily…..let’s look at the “Lucky” retiree and the “unlucky” retiree.

Both Lucky and Unlucky have a starting balance of $500,000 with annual drawdown of $30,000.

 1.The Lucky Retiree whose Funds will last

 

Period	Portfolio Value	Lucky Return	End of Period	Withdrawl	Remaining
1	$            500,000	+10%	$            550,000	$        30,000	$      520,000
2	$            520,000	+10%	$            572,000	$        30,000	$      542,000
3	$            542,000	+10%	$            596,200	$        30,000	$      566,200
4	$            566,200	+10%	$            622,820	$        30,000	$      592,820
5	$            592,820	+10%	$            652,102	$        30,000	$      622,102
6	$            622,102	+10%	$            684,312	$        30,000	$      654,312
7	$            654,312	+10%	$            719,743	$        30,000	$      689,743
8	$            689,743	-10%	$            620,769	$        30,000	$      590,769
9	$            590,769	-10%	$            531,692	$        30,000	$      501,692
10	$            501,692	-10%	$            451,523	$        30,000	$      421,523
	Average Return	4%

 

2.The “Unlucky” Retiree whose Funds Run Out too Soon
 

Period	Portfolio Value	Unlucky Return	End of Period	Withdrawl	Remaining
1	$            500,000	-10%	$            450,000	$        30,000	$      420,000
2	$            420,000	-10%	$            378,000	$        30,000	$      348,000
3	$            348,000	-10%	$            313,200	$        30,000	$      283,200
4	$            283,200	10%	$            311,520	$        30,000	$      281,520
5	$            281,520	10%	$            309,672	$        30,000	$      279,672
6	$            279,672	10%	$            307,639	$        30,000	$      277,639
7	$            277,639	10%	$            305,403	$        30,000	$      275,403
8	$            275,403	10%	$            302,943	$        30,000	$      272,943
9	$            272,943	10%	$            300,238	$        30,000	$      270,238
10	$            270,238	10%	$            297,262	$        30,000	$      267,262

 

Guess what? They both have the same average return of 4% over 10 years, but Unlucky has 40% LESS capital after ten years than Lucky.

Sequencing Risk

This is Sequencing risk. Sequencing risk is the risk that the order and timing of your investment returns is unfavourable, resulting in less money for retirement. Investment returns, good and bad, have more impact at some points in your superannuation lifecycle than at others. Negative investment returns early in retirement can be particularly damaging

Don’t let sequencing risk spoil your retirement plan

The consequences of sequencing risk are potentially strongest around the point of retirement. If you have a run of poor market results close to retirement, it can ruin your retirement plan. Before you retire, you might be able to extend your working years to save a bit more. It is much harder to go back to work after you have retired.

The good news is that there are ways to protect against the effects of sequencing risk. It can be a good idea to structure your cash flow needs around the time of your retirement to limit the risk that a poor sequence of investment returns impacts on your retirement goals.

Is there Protection Against Sequencing Risk?

We now have access to Investment Protection within selected MLC products that helps mitigate sequencing risk in pre and post retirement by protecting against market falls, whilst still locking in any rises in markets.

Watch the video…..

MLC Protected Income Video

This same type of protection can be provided in the pre-retirement phase from age 50 onwards. We will be discussing how this protection can be applied to your situation at your review through the year. If you have any questions, email them back.