You’ll have enough money to last through retirement as long as the average rate of return matches your plan
Some rules of thumb and long held assumptions may work well while you are saving for retirement. Holding on to them when you are spending those savings during retirement may become toxic to your financial health.
Averages can be very misleading when applied to rates of return during decumulation or spending periods. The pattern of returns can dramatically impact the size of your assets when you are withdrawing money to provide yourself an income to meet expenses. When you need to withdraw money and the markets are down, or what you take out is less than what your investment is earning, you eat into your retirement nest egg. It can be difficult to recover because you have to make up for the lower rate of return in a given year and account for the money you spent that is no longer invested. Negative rates of return in the early years of spending can be devastating on how much money you will have left 10, 15 or 20 years down the road, even if the long term average rate of return matches your plan. It’s not just about average rates of return; it’s about the sequence of returns that make up the average. Starting with a low or negative return has the potential to permanently upset your plans and how long your money will last.