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Mind the Gap: Don't Start Retirement on the Wrong Foot

Pandemic or not, life expectancies are on the rise! That likely means more time to enjoy the fun times with our children, and grandkids. For Americans, life expectancies increased to 78.7 years in 2018, according to the New York Times (1) . And 73% of healthy 65-year old couples could have a retirement lasting at least 25 years. 46% should be planning for a 30+ year retirement (2)!

While the expectancy for longer lives is good news, it can make thoughtful retirement and overall financial planning all the more important. In 1989, Americans were expected to live an average of 75 years; planning for three more trips around the sun might mean future retirees should consider a wide variety of strategies to replace their working paychecks to enjoy an even longer post-employment life.

The blue line in Chart One represents the portfolio of a 65-year-old investor who retired in 1989 with $1 million invested in a globally diversified portfolio of stocks. She withdrew $40,000 (4%) in her first year of retirement and increased those withdrawals by 2.5% each year to adjust for rising prices of food, gas, etc (finance geeks refer to increasing prices as inflation). 30 years later, her remaining portfolio would reach $2 million, and the investor would have withdrawn $1.8 million. But that was the scenario with investment returns starting in 1989. Would the outcome change if the returns changed? Does the sequence of returns matter (more finance geek language)? The answer is “yes” and sometimes it’s a bad “yes.”

The chart below also depicts a range of other possible outcomes where an investor withdrew exactly the same amount, $40,000, with identical inflation assumptions. The only difference being the sequence of returns (finance geeks refer to doing this over and over as Monte Carlo Analysis). In the Monte Carlo Analysis, 15% of portfolios ran out of money before 30 years were up. Tellingly, a portfolio’s first few years are of paramount importance – in situations where a retirement savings took a market hit within the first five years, the probability of running out of money hit 35%.

The Fairhaven financial literacy library found on contains a video on this very topic “Retirement Readiness: Mind the Gap”: “In those first years of retirement, if you run into a bear market and your portfolio drops in value, the double whammy of withdrawing funds PLUS your investments being worth less, puts a lot of pressure on anybody’s financial plan.”

Without a crystal ball knowing when the next bear market will strike, what can you do? First, it is important to be aware of this trap. Second, there are financial planning strategies to consider that can help dampen the impact of a bear market early in your retirement. For example, you might consider setting aside several years of income as a cushion to be drawn upon if needed. You can also structure your bond portfolio with varying maturities matching those first few years of retirement, also called a bond ladder. Specific bond maturities might help add a degree of permanence and definition to your sources of retirement income.

None of us can control or time market performance (run for the hills from anyone who claims otherwise). With thoughtful planning, however, you may be able to put yourself in a better position to get off on the “right” first step towards a fulfilling retirement.


About Fairhaven

Fairhaven Wealth Management is an independent, privately owned investment and wealth management firm serving select families and small to mid-sized businesses. At Fairhaven, our commitment is simple – we exist to serve our clients…period. Our culture of service and accountability combined with prudent risk management and tax-efficiency are the cornerstones of our client commitment.


For more information, please contact:

Marc Horner, CFP®

Founder & Wealth Advisor



This material has been prepared for informational and educational purposes for our clients and friends. Please consult your Fairhaven Wealth Management professional to discuss how this may impact your own financial plan and/or investment portfolio. This material is not intended to provide, and should not be relied upon for accounting, legal or tax advice or any other purposes. Neither Fairhaven Wealth Management nor its subsidiaries or affiliates provide accounting, legal or tax advice. Please consult your tax advisor or attorney for such guidance. Fairhaven Wealth Management is an SEC registered investment advisor. For a copy of the firm’s ADV Part 2 disclosure document please direct your inquiry to

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