Many of us grew up with the concept that making regular, periodic contributions to our retirement account was a sound investment strategy. The idea was that, in a fluctuating market, regularly investing a set amount would enable an individual to buy more shares when prices were low and fewer shares when prices were high.¹
Does this mean that taking regular, periodic withdrawals during retirement makes similar good sense?
Actually, it can be quite problematic.
Systematic withdrawals do the precise opposite of systematic investments by selling fewer shares when the price is high and more shares when the price is low. This, in effect, reduces the number of shares that may be able to participate in any subsequent market recovery.
Here’s an example.
In the accumulation phase, if a portfolio falls by 25%, it will require approximately a 33% return to get back to its pre-decline value.²
In the distribution phase, if you withdraw 5% of your portfolio for income and suffer the same 25% market decline, you would need to see a 43% market rebound to get back to pre-decline value.²