If two retirees both average 6.6% return over 30 years and take the same income in retirement, shouldn’t they both end up with the same amount of money? You may find the answer very surprising. In fact wouldn’t it be sad if one of these retirees ran out of money well before the 30 years was over while the other retiree ends up with more money than they started with?
This is real and referred to as “sequence of returns risk.” Though these two investors averaged the same return, the investor who ran out of money began his retirement with three years of a negative return on their portfolio, while the successful retiree didn’t experience a negative return on their portfolio until the fourth retirement year. For the visuals, MFS Fund Distributors has a wonderful illustration of this hypothetical example which we have conveniently provided in the references below.
Market volatility is a severe threat to your portfolio, but at the same time investments in retirement are like oxygen unless you spend absolutely nothing (your Social Security is all you will ever need), have a ton of life insurance and/or you are just loaded beyond your means. The key is taking the time to plan for this risk like any other.
Most people enter retirement fast and furiously—they get ready to plan for retirement when they’re poised to retire. Unfortunately, this type of entrance gains the greatest exposure to the sequence of returns risk. Even more unfortunately, this is the most common time we begin working with someone. It isn’t too late to do anything - it is almost never too late to do anything - but it is a lot more difficult. Ideally your actual retirement plan should begin as soon as possible. So if you are five years out you better get to moving. If you are ten years out you have a lot more options. If you are in your 40s…woohoo for you, the sky may be the limit, but this doesn’t mean procrastinate—right you potentially have access to the best investment tools in the world.
Just imagine if you could set up your retirement plan to never access your investments when the market is down. Imagine if you could still take advantage of the market volatility by buying fear and enjoying the ride up after you retire. Do you think either of these ideas could mitigate this sequence of returns risk you will face?
The only guarantee is that there are no guarantees in life. When you retire there is no guarantee what the next three years will be. And, if you are retired, there is no guarantee what the next three years will be. The key is to plan for just this.
Advisory services offered through Smart Money Group LLC, a Registered Investment Advisor. Securities offered through Calton & Associates, Inc. Member FINRA/SIPC. Kennedy Financial Services, Inc. is independent of Calton & Associates, Inc. and Smart Money Group LLC.