by Sound Choices, AGF Management Ltd.
A downturn when youâre in the withdrawal stage can have a critical impact.
The content in the article below is meant for Canadian investors only.
Earlier this year, the federal government reduced the 2020 RRIF minimum withdrawal by 25%. You may be wondering why they would take this extraordinary step.
This change helps to address one of the key risks retirees face with their investment portfolios â âsequence of returnsâ risk or the order in which you experience market returns.
When investing for the long term, downturns in the market are less important because your portfolio has a chance to recover.
But, when you start withdrawing, experiencing a downturn in the early years can have a critical impact on your portfolio.
Letâs look at an example to see how much of an impact the sequence of returns can have.
Both the scenarios and portfolios in this example are hypothetical and do not reflect actual investment performances.
Scenario #1 â Accumulation Phase
- Both Investor A and B invested $100,000 into their respective portfolios
- Neither withdraw any money
- At the end of 15 years, both investors have the same amount of money
| Year | Investor A | Investor B | ||
| Annual Return | Year-End Balance | Annual Return | Year-End Balance | |
| 1 | 20% | $120,000 | -7% | $93,000 |
| 2 | 12% | $134,400 | -11% | $82,770 |
| 3 | 14% | $153,216 | -12% | $72,838 |
| 4 | 17% | $179,263 | -8% | $67,011 |
| 5 | 10% | $197,189 | -5% | $63,660 |
| 6 | 8% | $212,964 | 6% | $67,480 |
| 7 | 5% | $223,612 | 5% | $70,854 |
| 8 | 6% | $237,029 | 6% | $75,105 |
| 9 | 5% | $248,881 | 5% | $78,860 |
| 10 | 6% | $263,813 | 8% | $85,169 |
| 11 | -5% | $250,623 | 10% | $93,686 |
| 12 | -8% | $230,573 | 17% | $109,612 |
| 13 | -12% | $202,904 | 14% | $124,958 |
| 14 | -11% | $180,585 | 12% | $139,953 |
| 15 | -7% | $167,944 | 20% | $167,944 |
| 4.53% average annual return | 4.53% average annual return | |||
Scenario #2 â Withdrawal Phase
- Investors C and D each invested $100,000 into the same portfolios as Investors A and B respectively
- They each withdraw $7,000 annual withdrawal at the end of the year
- Investor D runs out of money in year 11 â they never recovered from the early negative returns
| Year | Investor C | Investor D | ||||
| Annual Return | Withdrawal | Year-End Balance | Annual Return | Withdrawal | Year-End Balance | |
| 1 | 20% | $7,000 | $113,000 | -7% | $7,000 | $86,000 |
| 2 | 12% | $7,000 | $119,560 | -11% | $7,000 | $69,540 |
| 3 | 14% | $7,000 | $129,298 | -12% | $7,000 | $54,195 |
| 4 | 17% | $7,000 | $144,279 | -8% | $7,000 | $42,860 |
| 5 | 10% | $7,000 | $151,707 | -5% | $7,000 | $33,717 |
| 6 | 8% | $7,000 | $156,844 | 6% | $7,000 | $28,740 |
| 7 | 5% | $7,000 | $157,686 | 5% | $7,000 | $23,177 |
| 8 | 6% | $7,000 | $160,147 | 6% | $7,000 | $17,567 |
| 9 | 5% | $7,000 | $161,154 | 5% | $7,000 | $11,446 |
| 10 | 6% | $7,000 | $163,824 | 8% | $7,000 | $5,361 |
| 11 | -5% | $7,000 | $148,632 | 10% | $5,897 | $0 |
| 12 | -8% | $7,000 | $129,742 | 17% | $0 | $0 |
| 13 | -12% | $7,000 | $107,173 | 14% | $0 | $0 |
| 14 | -11% | $7,000 | $88,384 | 12% | $0 | $0 |
| 15 | -7% | $7,000 | $75,197 | 20% | $0 | $0 |
| $105,000 total withdrawal | $75,897 total withdrawal | |||||
Source: AGF Investments Inc. The tables above are both for illustrative purposes only. All of the rates and values referenced above are hypothetical and do not reflect actual investment or past performance, nor do they guarantee future performance.
The key take-away here is that â even though Investor C and D withdrew the same amount, because Investor D had the negative returns at the beginning, those returns had a much more serious impact on their net worth.
To learn more about market volatility, visit AGF.com/volatility and contact your financial advisor. They can help ensure your portfolio is diversified appropriately for your risk level, investment goals and time horizon.
The commentaries contained herein are provided as a general source of information and should not be considered personal investment or tax advice. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change investment decisions arising from the use or reliance on the information contained here.
The contents of this Web site are provided for informational and educational purposes, and are not intended to provide specific individual advice including, without limitation, investment, financial, legal, accounting or tax. Please consult with your own professional advisor on your particular circumstances.
AGF Management Limited (âAGFâ), a Canadian reporting issuer, is an independent firm composed of wholly owned globally diverse asset management firms. AGFâs investment management subsidiaries include AGF Investments Inc. (âAGFIâ), AGF Investments America Inc. (âAGFAâ), Highstreet Asset Management Inc. (âHighstreetâ), AGF Investments LLC (formerly FFCM LLC) (âAGFUSâ), AGF International Advisors Company Limited (âAGFIAâ), AGF Asset Management (Asia) Limited (âAGF AM Asiaâ), Doherty & Associates Ltd. (âDohertyâ) and Cypress Capital Management Ltd. (âCCMâ). AGFI, Highstreet, Doherty and Cypress are registered as portfolio managers across various Canadian securities commissions, in addition to other Canadian registrations. AGFA and AGFUS are U.S. registered investment advisers. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. AGF AM Asia is registered as a portfolio manager in Singapore. AGF investment management subsidiaries manage a variety of mandates composed of equity, fixed income and balanced assets.
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About AGF Management Limited
Founded in 1957, AGF Management Limited (AGF) is an independent and globally diverse asset management firm. AGF brings a disciplined approach to delivering excellence in investment management through its fundamental, quantitative, alternative and high-net-worth businesses focused on providing an exceptional client experience. AGFâs suite of investment solutions extends globally to a wide range of clients, from financial advisors and individual investors to institutional investors including pension plans, corporate plans, sovereign wealth funds and endowments and foundations.
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This post was first published at the AGF Perspectives Blog.
