Listen to Jeff Dixson’s interview about this subject with KXL FM 101.1’s Jim Ferretti- Aired 7/26/17
A significant risk facing retirees today that is often overlooked
When we’re contributing to our retirement accounts on a consistent basis, we’re making systematic purchases. We buy when the market is up and we buy when the market is down. Mathematically this allows us to “dollar cost average”. Over the decades of accumulation, this gives us a pretty good chance seeing our money grow.
When most people retire they’re no longer “buyers” but rather, they’re sellers because they need money to live on. Most people systematically sell their assets at a set percentage to provide the income they need to pay their bills.
Consider the tale of two brothers. We call them Brother A and Brother B. Brother A retired in 1991 and Brother B retired in 2001. They both started with $500,000 invested in an index fund that held the entirety of the DOW Jones. Each needed income to live so they took out $2,500 a month which is $30,000 a year. At the end of the 1990’s, Brother A’s account balance was $1,336,289. So he started with $500,000 and took out $300,000 and he ended up with over $1.3 million.
Brother B wasn’t so lucky. He retired in 2001 with the same $500,000 and took out the same $30,000 per year for the next 10 years. At the end of the 2000’s his account balance was $203,342. 60% of Brother B’s assets were gone after the first ten years of retirement.
The only difference between Brother A and Brother B was their sequence of returns.
The issue comes when the market, or the underlying securities you’re drawing from, don’t appreciate but rather depreciation. This can cause you to run out of money even faster. It’s not something people think about but it has caused a lot of people to have to go back to work after being retired.