08/22/2026
For illustration, this is one of the worst trials, number 996 of 1,000.
While none of the answers we got on the question were exactly right, they were still good answers. Returns, spending, inflation, natural disasters, health care expenses....all things that can have tremendous impact. But again in this illustration all income, expense, average return, inflation and life expectancies were the same in all cases.
The answer believe it or not is "sequence of returns:". This particular case was built on an average 5.8% return assumption. Most times that's looked at linearly, 5.8% year after year. But of course, that's not how life works.
So the 1,000 illustrations show 1,000 different combinations of return sequences that still all average 5.8%.
In real life, it's sorta easy to see that someone who retired in 2012 or 2017 would have had a very different experience than someone who retired in 2000 or 2007 (just before two market crashes), even with the exact same investments, and particularly if they were aggressive.
If anyone is still reading, Maryann's response of 4% distribution rate was on the right track. The higher your planned distribution rate (income you need/what you have), the more risk you have and the wider variance in all of the illustrations. This makes sense conceptually at the extreme - if a client needs NO income from investments at retirement, sequence of returns doesn't matter because it all averages out over your lifespan.
But if you are taking $40K from your $1M (4%), and the $1M drops to $600K in a year, you are now taking a 6.67% (unsustainable) distribution rate and will be on the path to running out of funds. And once that starts, it's hard to stop unless you change another variable.
We of course help clients with this because we do this every year for them. We also base our planning on conservative assumptions. Higher distribution rates require more conservative (and lower long term return) investments. Older clients who take no income can still be invested very aggressively (higher long term returns) because sequence of returns doesn't matter.
This particular client has choices to make, because 40% is too low to be comfortable. This is where productive conversations happen. Is it really important for them to retire in 2028 or do they want to wait a few years? Or do they want to assume a slightly lower spending level? Or do they want to assume the risk and see what a 7% annual return may look like vs. 5.8%? Or do they want to change some other assumption like saving more? We run these scenarios over Teams with clients every day so that clients feel secure that they have a viable plan in place.
