Averages Mean Nothing In Retirement
Return sequence, or return sequencing, is a phrase used to describe the year-over-year investment returns experienced by a portfolio for a select period. This sequence could look something like this over a 5 year period:
Year 1 Return: 5.00%
Year 2 Return: -2.00%
Year 3 Return: -10.00%
Year 4 Return: 7.00%
Year 5 Return: 15.00%
Average = 3% Yearly
If you have $100,000 invested during this example 5 year period this is what your portfolio would have looked like:
Starting Amount $100,000
After Year 1: $105,000
After Year 2: $102,900
After Year 3: $92,610
After Year 4: $99,092.70
After Year 5: $113,956.60
Average = 3% Yearly
That is an example of a Return Sequence.
Fixed Interest Instead of Average
What if you received a fixed rate of interest at 3% each year, would your account be the same value?
Lets check it out!
Starting Amount $100,000
Year 1 Return/Amount: 3.00% / $103,000
Year 2 Return/Amount: 3.00% / $106,090
Year 3 Return/Amount: 3.00% / $109,272.7
Year 4 Return/Amount: 3.00% / 112,550.88
Year 5 Return/Amount: 3.00% / $115,927.41
Wait, why is it more if it is the exact same average of 3% in both examples?
Lets look back at the graph above!
When you have a loss in a portfolio from market volatility or a withdrawal that made the account decrease you now find yourself in a hole that you have to climb out of. That requires a larger gain needed to return back to break even from the prior year.
The graph above shows how much of a return you would need to break even after a loss.
A 50% loss would need a 100% gain to break even. Is that possible?
Short answer - NO!
A Fixed & Indexed Annuity eliminates this risk due to your account always have a floor of 0%, meaning you can never experience a loss.
The more you know.
