According to Investment Company Institute, more than $37 trillion was in retirement plan assets as of September 2021.1 And a 401(k) study by Fidelity Investments revealed the average 401(k) balance climbed to a record $130,700 in 4Q 2021.2
While the savings are encouraging, there is a real challenge for those not independently wealthy. Once retired, they will need to create an income strategy that produces the income they need while being sensitive to market risks.
One of the most significant risks is the sequence of returns risk. In other words, withdrawing income from an underperforming portfolio. If a retiree withdraws income while the account is down or underperforming, the underperformance may be locked in. The amount removed no longer can increase if, or when, the market rises again. So, the withdrawal happens at the wrong time (during a difficult market). To find out more about protecting retirement income from sequence of returns risk, download our consumer brochure.
Running a simple spreadsheet model that assumes a flat yearly return, let’s say 6%, might result in a very positive outcome because it doesn’t reflect the volatility needed to achieve the 6% return during the decumulation phase. We'll likely get a very different result if we run a Monte Carlo simulation with a commensurate amount of volatility.