SEQUENCE OF RETURNS RISK
Remember 2008? Sure you do. That was the year of the financial crisis. When the stock market lost nearly 40% of its value, and shrank the assets that millions of baby boomers were counting on to fund their retirement. Of course, the markets rebounded. So, no worries right?
Well, it’s true that during the years you’re saving for retirement, if the market drops, you may have time to rebuild your assets that are subject to market volatility. But, once you start withdrawing your money, that’s when market volatility can have a big impact on how long your assets will last, and how comfortable you can live in retirement.
One factor in how BIG an impact, is your SEQUENCE OF RETURNS. That’s the year by year returns that your retirement assets continue to experience while you’re drawing on them for retirement income.
Say you’re retiring with a nest egg of $1 million dollars, and you plan to withdraw $50,000 per year, with a slight increase every year for inflation. Meanwhile, your remaining asset is still invested, and still subject to the ups and downs of the market. Of course, we can’t predict those ups and downs - your sequence of returns. But let’s say it goes like this...
Now, with compounding, you’ll average a good positive return over those 4 years. And that’s what you want right?
So let’s keep repeating that sequence of returns in the that order, until your annual withdrawals have completely used up the asset...
But, what would have happened if you had started withdrawing money in a DOWN market?
To find out, let’s take those same four numbers, and this time, we’ll reverse the order...
Just as before, with compounding, you’ll average the exact same good positive return over those 4 years. And that’s what you want... RIGHT?
And as before, we’ll keep repeating that sequence until your annual withdrawals have completely used up the asset...
YOU WOULD HAVE LOST 13 YEARS OF INCOME, AND ONLY BECAUSE YOU GOT THE SAME RETURNS IN A DIFFERENT ORDER!
Of course, there’s no way to predict the order of your returns, or whether it will be an up market, a down market, or a flat market when you start your retirement.
However, there are potential retirement income solutions, like an annuity, that can provide protection against losses due to market volatility. An annuity can also be a source of guaranteed income for your retirement years.
Remember, every additional year your assets last, can mean fewer financial worries, and a level of comfort. Yes, a long retirement is good, but it’s even better when you have the money to enjoy it!