A growing number of clients approaching retirement age may be tempted to dip into that nest egg early – but advisors need to ensure that what is coming out doesn’t exceed what is going in.
Some rules of thumb and long held assumptions may work well while saving for retirement, says Peter Wouters, director of tax retirement and estate planning services, wealth, Empire Life Investments. And 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,” says Peter Wouters, director of tax retirement and estate planning services, wealth, Empire Life Investments. “The pattern of returns can dramatically impact the size of a client’s assets when they are withdrawing money to provide an income to meet expenses.”
When a client needs to withdraw money and the markets are down, or they are taking out less than what the investment is earning, the client is eating into that 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,” says Wouters. “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,” he says.