The Impact of the Sequence of Investment Returns
Why A 10% Return Doesn't Ensure Success
Most people would jump at the chance to earn a 10% average annual return in retirement. But averages can be misleading, especially for retirement portfolios used to generate income. As the following example shows, it’s often the sequence of returns that will result in investment success or failure in retirement. Let’s look at the assumptions used for this example.
Two hypothetical retirement portfolios:
- Each has an initial value of $500,000
- Portfolio 1 reflects S&P 5001 calendar year returns from 1969 to 1994
- Portfolio 2 reverses the order of those S&P returns
- $30,000 annual withdrawals, beginning in year 1 for both portfolios
- Withdrawals increase 3% annually for inflation
This example shows that investment losses early in retire-ment may jeopardize the sustainability of a portfolio and its ability to generate meaningful income that will last a life-time. Just when the owner of Portfolio 1 retires and begins taking systematic income withdrawals, the market delivers negative returns. Although performance improves, Portfolio 1 is unable to recover from its initial losses. By year 26 it is nearly depleted, with only $19,369 in assets remaining.
For Portfolio 2, market performance is positive when systematic income withdrawals begin. By year 26, Portfolio 2 has a projected available balance of more than $2 million.
These results are dramatic and can have implications for both a retiree and his or her heirs.
A period of market losses that occurs when a person is tran-sitioning into retirement can have a devastating impact on the income-generating potential of his or her portfolio. To help safeguard retirement income, it’s important to consider multiple strategies that will generate income for as long as you need it.
Annuity Payouts - Income You Can't Live Without
Did you know that there are only three types of income that are guaranteed for life? They are: Social Security, an employer pension plan (if you’re fortunate enough to have one) and annuities (when you choose a life annuity option). For this reason, annuities can be a compelling addition to a
systematic withdrawal plan.
Types of Annuities
Annuities are designed to help you meet long-term goals, like saving for retirement. When you are ready, they can provide a stream of income, for life or for a period of time you choose. Different types of annuities address specific needs and risk tolerances. Depending on your choice, an annuity may help you to:
- Mitigate the risk of outliving your assets
- Generate a guaranteed income for life or for a specific period of time
- Provide steady income in the form of fixed payments
- Offer income growth potential with variable payments.
It’s important to get the facts on any annuity that you may be considering because there are significant differences among them. Would you prefer a fixed, predictable income stream or the growth potential associated with variable annuities? Do you need your income to begin immediately, or at some time in the future? Is liquidity important to you? What about death benefit protection? The answers to these and many other questions will help you to make a decision that’s right for you.
Your financial professional can help you identify your needs and clarify your objectives so that you can evaluate all of the options available to you.
1 The S&P 500 Index is a list of securities frequently used as a measure of U.S. stock market performance. Indices are unmanaged and do not represent the performance of any MassMutual product or specific underlying fund. Indices are not available for direct investment. Past performance is not indicative of future results. Source: S&P Micropal.
The information provided is not written or intended as specific tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel.
Variable annuities are sold by prospectus. Before purchasing a variable annuity contract, investors should carefully consider the investment objectives, risks, charges and expenses of the variable annuity contract and its underlying investment choices. For this and other information, obtain the prospectuses for the variable annuity contract and its underlying investment choices from your registered representative. Please read the prospectuses carefully before investing or sending money. CRN202205-264566