Why financial planners don’t assume a first year recession decline. How come they put down a less than S&P 7%, like 5%, and don’t factor in a bad start as soon as you retire?

Question

Why financial planners don’t assume a first year recession decline. How come they put down a less than S&P 7%, like 5%, and don’t factor in a bad start as soon as you retire?

In: Economics

Answer 1

Some do. It’s called sequence of return risk. You could have 2 portfolios with the same average return over a 20 year period but one that has more negative years in the beginning vs the end. If you are withdrawing money yearly the one with the negative returns first will run out whereas the one with the negative returns later will most likely survive just fine and may even grow.

We also use less than market growth because most people shouldn’t be 100% in the market and even then we need to have some sort of higher confidence level in the plan so we will use a lower average return to take in account poorer than average returns through out retirement.