Staying active, healthy and connected
June is Seniors’ Month in Ontario: it’s a time to recognize and celebrate the older members of our society and support them in staying active, healthy and connected, all challenges at the moment.
Sequence of Returns
The Ontario Securities Commission published a special newsletter this month focusing on seniors with advice for budgeting, choosing an investment advisor, using your home as an investment, avoiding fraud, etc.
Seniors certainly have to be aware of and cautious about many aspects of their finances. One which always concerns me is the Sequence of Returns, which is a real threat to seniors, potentially causing them to deplete their assets in retirement when making withdrawals in a market downturn.
First of all, an illustration of the Sequence of Returns by following the results of two best friends. Anne withdrew from her $500,000 portfolio during a period when the market fell by 5% during the first year of her withdrawals and then recovered. Her friend, Frances, withdrew the same monthly amount from her equivalent $500,000 investments during a period when the market grew by 5% each year.
The effect of withdrawing from investments during a year with losses affected Anne to the point that at the end of the first year period, the remaining value of her investments was $411,034. Frances, who had the advantage of the market going up throughout her first three years of withdrawals had $464,476 remaining. Frances has an extra seventeen months of withdrawals at $3000 per month compared to Anne. That’s at the end of only three years.
The explanation of how this happens can be followed in the table below. Each unit of your investments has a dollar value. To provide cash to you, more units have to be sold when the market declines. If the market goes up, fewer units are sold.
|Month||Withdrawl||Price/Share||# of Shares|
As you see, you could have to sell anywhere from 238 to 312 units to generate the same amount of cash.
When you are younger and building your portfolio, you may use monthly contributions, or dollar cost averaging strategy to average out the cost of units in the investments; buying some when the market is down and others when it is higher. However, the reverse of this can certainly hurt you when withdrawing.
When planning for retirement, you have many unknowns to factor into your plans for the golden years:
- Your life span
- Your health
- Your investments
You don’t want the Sequence of Returns to adversely affect your plans. There are clever solutions to avoid reverse dollar cost averaging from unnecessarily depleting your savings. Contact me for more information.