One of the stated benefits of Manulife IncomePlus is protection against a poor sequence of returns in the withdrawal phase of retirement. Here’s how this brochure explains the concept:
During the accumulation phase, regardless of whether a portfolio experiences poor or strong returns early on, the market value will be the same in the end.
This is not true in the retirement phase. As the table below shows, Portfolio A experiences poor early returns and runs out of money within 20 years. Portfolio B, which has strong early returns, benefits from 15 more years of withdrawals and still has a positive market value at age 100.
While, this is a legitimate concern, it is incorrect to focus only on price levels and ignore a very important component of stock returns: dividends. The example cited shows the effect of a sequence of returns on two portfolios. When the sequence of returns over 7 years is -23.1%, -6.1%, -0.3%, 24.5%, 18.0%, 19.6% and 22.7%, the poor early returns combined with capital withdrawals decimate the portfolio. But when the sequence of returns is reversed, the portfolio is able to support withdrawals for a much longer time period.
The problem with this example is that it completely ignores dividends. Today, the dividend yield on the major indexes is close to 3%. An investor with her entire portfolio in stocks can consume the dividends and reasonably expect the portfolio to last for a very long time. Then again, if the fees you pay for money management is greater than the dividend yield, a poor sequence of returns could quickly deplete the portfolio.
