Can You Control the Uncontrollable and Forget the Rest?

In last week’s video, we illustrated how two sets of hypothetical portfolios with the exact same investments could have entirely different outcomes over ten years simply by changing the date that a retiree began taking withdrawals. There’s a link to that video here on the page. If you haven’t seen it, we suggest you watch that one first for context, so that what we are saying here might make more sense to you.

One of our imaginary investors had a diversified portfolio with $1 million and an inflation-adjusted $45,000 annual distribution starting on January 1, 1990, and wound up with a portfolio value of nearly $1.3 million just ten years later. Our other imaginary investor, who simply placed their $1 million of assets in the S&P 500, and who took the same annual withdrawals, wound up ten years later with just over $3.5 million.

We compared that with two other hypothetical investors who did exactly the same thing as the first two, but started taking withdrawals on January 1, 2000 instead. What did they have ten years later? Our imaginary S&P 500 investor had just $369,000 left, while the diversified one still had about $1.3 million.

The only thing different was the date that these retired hypothetical individuals began taking money from their respective portfolios. One pair started in 1990, the other in 2000 — with vastly different outcomes for the S&P 500 investors.

This was, as said, over a ten-year period of time. But how would these hypothetical investors have done over a twenty-year period of time? Let’s take a look.

From 1990 to 2010, our imaginary S&P 500 investor ended the 20-year period with assets of $2.7 million, and a portfolio draw of 2.9 percent with their $45,000 annual inflation-adjusted distribution.  The diversified individual ended with $1.7 million and a portfolio draw of 4.5 percent, right where they started.

For the two hypothetical investors who started on January 1, 2000, after 19 years, we see a big difference in results:

Our imaginary diversified individual ended the period with just under $1.2 million, and a 5.6 percent portfolio withdrawal rate.  The imaginary S&P 500 investor?  They’ve got just $95,000 left of their original $1 million.  After just 19 years, they’re almost out of money.

The point here is that risk and volatility matter, especially early on.

And this is why we do what we do.  If we want to reach our goals, we aim to reduce the amount of risk we take along with our potential range of outcomes.  And since we cannot predict the future with any accuracy at all, we believe that defending against the possibility of loss may give us better results in the end.

Important Information:

The information provided should not be considered specific tax, legal, or investment advice and is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. This material was gathered from sources believed to be reliable, however, its accuracy cannot be guaranteed.

You should always seek counsel of the appropriate advisor prior to making any investment decision. All investments are subject to risk including the loss of principal.

No client or prospective client should assume that the presentation (or any component thereof) serves as the receipt of, or a substitute for, personalized advice from LCG or from any other investment professional.

Case studies are hypothetical, are for illustrative purposes only, are not guaranteed and subject to potential federal and state law amendments. There is no guarantee that you will achieve the results discussed or illustrated. Past performance is no guarantee of future results.

The S&P 500 Index is an unmanaged index and includes a representative sample of large-cap U.S. companies in leading industries. An investment may not be made directly in an index.

Rick Plum is a registered representative of, and offer securities through, Lucia Securities, LLC, a registered broker/dealer, member FINRA/SIPC. Advisory services offered through Lucia Capital Group, a registered investment advisor, and an affiliate of Lucia Securities, LLC. Registration with the SEC does not imply a certain level of skill or training.

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