The Timing of Retirement Planning Returns

Are all returns created equally? Does it matter when you get positive vs. negative returns? When you are saving for a long-term goal like retirement, the likelihood of you having some years with negative returns is pretty high.

The reason I bring all this up is that I have been having an interesting conversation about retirement planning with a fellow on the Saving Advice website. The topic of the conversation was whether or not it matters if you get negative returns the first few years of a long-term goal or the last few years. Here are the assumptions made:

The goal is $1,000,000 thirty years from now. The assumed rate of return is 8%, which requires an annual contribution of $8,827. So, I took that information and plugged it into two different scenarios. The first scenario assumed that the portfolio lost 2% per year for the first 5 years and gained 8% thereafter. The second scenario assumed that the portfolio gained 8% per year for the first 25 years and then lost 2% per year for the last 5 years. I think the chart below makes it pretty clear:

Retirement Savings

Here's what the annual numbers look like:

End of       Account        Account

 Year   ROR    Value   ROR    Value

     2   8%    $9,533  -2%    $8,650

     3   8%   $19,829  -2%   $17,128

     4   8%   $30,948  -2%   $25,436

     5   8%   $42,957  -2%   $33,578

     6   8%   $55,927  -2%   $41,556

     7   8%   $69,935   8%   $54,414

     8   8%   $85,063   8%   $68,300

     9   8%  $101,401   8%   $83,298

    10   8%  $119,046   8%   $99,495

    11   8%  $138,103   8%  $116,987

    12   8%  $158,684   8%  $135,879

    13   8%  $180,912   8%  $156,283

    14   8%  $204,918   8%  $178,319

    15   8%  $230,845   8%  $202,117

    16   8%  $258,845   8%  $227,820

    17   8%  $289,086   8%  $255,579

    18   8%  $321,746   8%  $285,558

    19   8%  $357,019   8%  $317,936

    20   8%  $395,114   8%  $352,904

    21   8%  $436,256   8%  $390,670

    22   8%  $480,690   8%  $431,456

    23   8%  $528,678   8%  $475,506

    24   8%  $580,506   8%  $523,080

    25  -2%  $577,546   8%  $574,459

    26  -2%  $574,645   8%  $629,949

    27  -2%  $571,803   8%  $689,878

    28  -2%  $569,017   8%  $754,602

    29  -2%  $566,287   8%  $824,503

So, from the looks of this, it is much better to have your losing years in the beginning rather than in the end.