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The Retirement Multiplier Effect -

Addressing the Combination of Withdrawals, Inflation, and Timing

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In two pre­vi­ous blog posts we dis­cussed the impact of “curve­balls” upon retire­ment plan­ning.

The first curve­ball was the impact of tim­ing in the post “Tim­ing is Every­thing? Or is It?” We explored how the suc­cess or fail­ure of an invest­ment plan is due in large part to when an ini­tial invest­ment was made, a seem­ing­ly ran­dom vari­able. Over the time hori­zon ana­lyzed, the end­ing val­ue of a $100,000 invest­ment in the S&P 500 Index after ten years could have been as high as $209,470 or as low as $87,006, based sole­ly upon when the indi­vid­u­al made the ini­tial invest­ment (Source:Zephyr StyleAD­VI­SOR).

  • Take-away is that if you can’t pre­dict it, it makes it very dif­fi­cult to plan for it.

The sec­ond curve­ball is the impact of tak­ing with­drawals from an invest­ment plan, dis­cussed in “Suf­fer­ing From With­drawals?”  As investors shift from the accu­mu­la­tion to dis­tri­b­u­tion stages of their life cycle, the neg­a­tive con­se­quences of large bear mar­kets become much more pro­nounced. Mar­ket draw­downs are no longer oppor­tu­ni­ties to “buy on a low.” Instead, retirees are forced to liq­ui­date their hold­ings dur­ing times of mar­ket weak­ness.

  • Take-away from that post is with­draw­ing funds from a sink­ing mar­ket makes it all the more dif­fi­cult to recov­er loss­es.

In this blog post, we com­bine the­se two analy­ses into what we call a WIT Analy­sis” - in oth­er words, explor­ing the com­bined impact of with­drawals, infla­tion, and tim­ing on an invest­ment.

How an invest­ment plan might look after a decade in the real world, if a retiree is forced to take with­drawals and had the bad luck of invest­ing at the wrong time.

WIT Analysis - Withdrawals, Inflation, Timing - Swan BlogSource: Swan Glob­al Invest­ments

Again, we assume an ini­tial invest­ment, this time $1,000,000 to reflect a retire­ment account at point of ini­tial dis­tri­b­u­tion, in one of three options:

  1. the S&P 500 Index;
  2. the Swan DRS Select Com­pos­ite or;
  3. the Morn­ingstar Tar­get Date 2000-10 cat­e­go­ry aver­age*.

Each invest­ment is made for ten years, start­ing on Jan­u­ary 1st. The results are “rolled for­ward” year­ly, mean­ing the first invest­ment peri­od extend­ed from 1/1/98 to 12/31/07, the sec­ond invest­ment peri­od is from 1/1/99 to 12/31/08, etc.

How­ev­er, rather than assum­ing a sim­ple buy-and-hold for each of those decades, we intro­duce the idea of tak­ing out with­drawals, adjust­ed for infla­tion.

At the end of each year we take out $50,000, adjust­ed for a 3% infla­tion rate. In addi­tion, we added the most recent decade of 1/1/06 to 12/31/15. How do our three invest­ment options stack up?

* Note — You can­not invest direct­ly in either the S&P 500 or the Morn­ingstar Tar­get Date 2000-10 cat­e­go­ry aver­age. The S&P 500 was select­ed as a broad proxy for the U.S. equi­ty mar­ket. The Morn­ingstar Tar­get Date 2000-10 was select­ed as a proxy for those tar­get date funds deemed suit­able for some­one in or near retire­ment the decade of 2000–2010.

Impact of Combination of Withdrawals, Inflation, Timing - Swan Blog

Source: Zephyr StyleAD­VI­SOR

After ten years and $573,194 of with­drawals, the aver­age invest­ment in the S&P 500 still had a remain­ing val­ue of $828,524. How­ev­er, that aver­age masks a lot of vari­abil­i­ty.

The “best case” sce­nar­io, an invest­ment made on Jan­u­ary 1st, 2003, had an end­ing val­ue of $1,250,045.

The “worst case” sce­nar­io was an invest­ment made on Jan­u­ary 1st, 2000. That unlucky investor was sub­ject to not one but two major bear mar­kets. Forced to take with­drawals in the down years of 2000, 2001, 2002 and 2008, the pool of cap­i­tal remain­ing was only $303,027 at the end of 2009.

The aver­age tar­get date fund of the vin­tage 2000–2010 had very sim­i­lar end­ing val­ues as the S&P 500, but with less vari­abil­i­ty between best and worst.

The Swan DRS post­ed the best results of the three.

The aver­age end­ing val­ue after a decade, tak­ing out the same $573,194 of with­drawals, was $1,397,189. There was lit­tle dis­per­sion between the best decade and the worst decade, with val­ues of $1,535,377 and $1,263,360, respec­tive­ly. Full results are below:

Withdrawal-Analysis-Rolling-10yr-periods-Swan-DRS-vs-SP500-MSTD2000-10

Source: Zephyr StyleAD­VI­SOR

 

The­se results sup­port the prime objec­tive of the Defined Risk Strat­e­gy: to strike the right bal­ance of upside par­tic­i­pa­tion dur­ing bull mar­kets and down­side pro­tec­tion dur­ing bear mar­kets.

Since its incep­tion in July 1997 the DRS has suc­cess­ful­ly nav­i­gat­ed through three bull mar­kets and two bear mar­kets.

We are often asked, “What is the appro­pri­ate time hori­zon in which to mea­sure the DRS’s per­for­mance?” Our answer to that ques­tion is always a full mar­ket cycle, mean­ing one that incor­po­rates a bull and a bear. Each of the decades in this WIT analy­sis con­tain at least one bull and one bear mar­ket.

The­se issues are explored in-depth in a paper called “The Retire­ment Conun­drum: Unty­ing the Gor­dian Knot.”

 

Feel free to review more infor­ma­tion on the Defined Risk Strat­e­gy per­for­mance, or its com­po­nents, call 970.382.8901.

Marc Odo, Marc Odo, CFA®, CAIA®, CIPM®, CFP®, Director of Investment Solutions - Swan Global InvestmentsAbout the author: Marc Odo, CFA®, CAIA®, CIPM®, CFP®, Direc­tor of Invest­ment Solu­tions, is respon­si­ble for help­ing clients and prospects gain a detailed under­stand­ing of Swan’s Defined Risk Strat­e­gy, includ­ing how it fits into an over­all invest­ment strat­e­gy. For­mer­ly Marc was the Direc­tor of Research for 11 years at Zephyr Asso­ciates.

 

Impor­tant Notes and Dis­clo­sures:

Swan Glob­al Invest­ments, LLC is a SEC reg­is­tered Invest­ment Advi­sor that spe­cial­izes in man­ag­ing mon­ey using the pro­pri­etary Defined Risk Strat­e­gy (“DRS”). SEC reg­is­tra­tion does not denote any spe­cial train­ing or qual­i­fi­ca­tion con­ferred by the SEC. Swan offers and man­ages the DRS for investors includ­ing indi­vid­u­als, insti­tu­tions and oth­er invest­ment advi­sor firms. Any his­tor­i­cal num­bers, awards and recog­ni­tions pre­sent­ed are based on the per­for­mance of a (GIPS®) com­pos­ite, Swan’s DRS Select Com­pos­ite, which includes non-qual­i­fied dis­cre­tionary accounts invest­ed in since incep­tion, July 1997, and are net of fees and expens­es. Swan claims com­pli­ance with the Glob­al Invest­ment Per­for­mance Stan­dards (GIPS®). All data used here­in; includ­ing the sta­tis­ti­cal infor­ma­tion, ver­i­fi­ca­tion and per­for­mance reports are avail­able upon request. The S&P 500 Index is a mar­ket cap weight­ed index of 500 wide­ly held stocks often used as a proxy for the over­all U.S. equi­ty mar­ket. Index­es are unman­aged and have no fees or expens­es. An invest­ment can­not be made direct­ly in an index. Swan’s invest­ments may con­sist of secu­ri­ties which vary sig­nif­i­cant­ly from those in the bench­mark index­es list­ed above and per­for­mance cal­cu­la­tion meth­ods may not be entire­ly com­pa­ra­ble. Accord­ing­ly, com­par­ing results shown to those of such index­es may be of lim­it­ed use. The adviser’s depen­dence on its DRS process and judg­ments about the attrac­tive­ness, val­ue and poten­tial appre­ci­a­tion of par­tic­u­lar ETFs and options in which the advis­er invests or writes may prove to be incor­rect and may not pro­duce the desired results. There is no guar­an­tee any invest­ment or the DRS will meet its objec­tives. All invest­ments involve the risk of poten­tial invest­ment loss­es as well as the poten­tial for invest­ment gains. Pri­or per­for­mance is not a guar­an­tee of future results and there can be no assur­ance, and investors should not assume, that future per­for­mance will be com­pa­ra­ble to past per­for­mance. All invest­ment strate­gies have the poten­tial for prof­it or loss. Fur­ther infor­ma­tion is avail­able upon request by con­tact­ing the com­pa­ny direct­ly at 970–382-8901 orwww.swanglobalinvestments.com. 037-SGI-020916