The distinction becomes more important for investors harvesting income from their equity portfolios. Assuming a 5 percent withdrawal rate with annual withdrawals adjusted for inflation, and using Ibbotson’s large company stock returns, investors would have run out of money in 10 of 63 rolling 30-year periods.

High inflation during the 1970s was a powerful force, but the sequence of returns was an important factor. Large company stocks returned 11.9 percent annualized in the 30-year period starting in 1967, almost identical to the 12.1 percent annualized return in the 30 years starting in 1968. And yet the investor starting in 1967 ran out of money in year 29 while to an investor starting in 1968 would have exhausted their portfolio in year 20. The reason for this 9-year disparity was a 20 percent return in 1967, which the 1968 investor missed by 1 year.

Put another way, the hypothetical investor would have run out of money in retirement, in essence batting .000, in 16 percent of the 30-year periods—though you would never have guessed it by looking at total returns for these periods.

The accumulation phase of an investor’s lifecycle has dominated discussion in the financial industry—but tools to analyze the wealth spend-down phase are lacking in comparison.

Steve Chun is director of product and marketing development at Miller/Howard Investments, Woodstock, New York. Working with advisors for over 20 years, Steve notes that success begins with being a good listener and providing innovative investment solutions.    

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