Retirement planning often overlooks the order in which investment gains and losses occur. A tool that models the impact of varying return patterns on a portfolio’s longevity, particularly during withdrawals, addresses this crucial aspect. For instance, two portfolios with the same average annual return can yield drastically different outcomes depending on when losses and gains occur. A large loss early in retirement, even if followed by strong gains, can significantly deplete savings and jeopardize long-term financial security.
Analyzing the potential impact of different return sequences allows for more robust retirement planning. By understanding this variability, individuals can adjust their withdrawal strategies, asset allocation, or savings targets to mitigate potential shortfalls. This approach moves beyond average returns and provides a more realistic assessment of retirement sustainability, particularly crucial for those in or nearing retirement. Historically, retirement planning relied heavily on average returns, often leading to overly optimistic projections. Recognizing the importance of return sequence adds a layer of sophistication to financial planning.