Many people approaching retirement want to know what an advisor’s returns have been. It seems like a smart question. It helps them compare advisors and judge their competence.
For someone already retired or close to it, focusing on past returns can lead to the wrong decision.
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Their Situation
Sally recently retired with one million dollars in savings. She needs to withdraw seventy-five thousand dollars per year from her portfolio to meet her income needs.
She considers herself a balanced investor. That means about half of her portfolio is focused on long-term growth and the other half on preserving capital.
Sally was referred to two advisors, Jennifer and Carl.
When she met with Jennifer, she asked how her balanced portfolio had performed. Jennifer said it averaged five and a half percent over the last ten years.
When she met with Carl, she asked the same question. Carl said his balanced portfolio had averaged six and a half percent over the same period.
Sally enjoyed both conversations. She chose to work with Carl because his returns were higher.
The Retirement Trap
At first, Carl seemed like the obvious choice. Higher performance usually sounds like the better option.
Since Sally is now retired and withdrawing money each year, volatility plays a more important role. Average returns alone no longer tell the full story.
Let’s look at what would have happened if Sally had worked with each advisor over the past ten years while withdrawing seventy-five thousand dollars annually.
With Jennifer’s portfolio, she would have just under six hundred ninety-five thousand dollars remaining.
With Carl’s portfolio, she would have just under six hundred forty-four thousand dollars left.
Despite Carl’s higher average return, Jennifer’s more consistent performance would have left Sally with more money.
Why This Happens
Carl’s portfolio experienced more dramatic ups and downs. That extra volatility is harmful when you need to withdraw money during market declines.
Taking income while markets are down locks in losses and reduces the base from which future returns can grow.
Jennifer’s portfolio didn’t grow as fast, but it delivered steadier returns. That consistency helped reduce the risk of drawing income during a downturn.
Final Thoughts
For people in retirement, past performance isn’t the most important factor when choosing an advisor.
Managing volatility and planning for withdrawals in both good and bad markets makes a much bigger difference.
If you’re concerned about how market swings could affect your retirement income, consider going to our website and booking an appointment with us.
