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January 2019
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I recently encountered an article from the Early Retirement Now blog, discussing just how much sequence of returns risk matters in retirement. The article isn't new (May 2017). And it's pretty math-heavy. But it's worth a read. One noteworthy finding: over a 30-year retirement, only 31% of the variation in safe withdrawal rates is explained by the average return earned by the portfolio over that 30-year period. 64%, however, is explained by the sequence of those returns. If the math intimidates you, I would still encourage you to at least click over to the article and find the second table - the one with a column of green-highlighted cells. What these cells are showing you is how important each 5-year window of returns is in determining safe withdrawal rate. It's quite striking how much less important each 5-year window of returns is, relative to the prior 5-year window. For example, years 0-5 explain more than 28% of the variation in safe withdrawal rate. Years 5-10 explain another 19%. Years 10-15 explain another 13%. And so on. Key takeaway being: the returns that your portfolio earns in the first several years of retirement matter a lot.
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