It really does matter when you retire.
Sequence of Returns Risk makes the "when" of your retirement a pretty big deal.
Investopedia defines this risk as “the danger that the timing of withdrawals from a retirement account will have a negative impact on the overall rate of return available to the investor. This can have a significant impact on a retiree who depends on the income from a lifetime of investing and is no longer contributing new capital that could offset losses.”
To put it plainly, the timing of your retirement can affect the longevity of your retirement accounts.
If the value of your life savings drops 40% in your first year of retirement, and you still have to sell your stocks to have money to live, it could drop the value of your investments to a place where what you have left in your account only lasts 15 years instead of 30.
Here’s the reality: in the “wealth building” phase of retirement planning, every time you add money to your retirement accounts (if they’re stock investments), that money is going to be used to purchase stocks. Everyone knows that the stock market tends to fluctuate, and we have all been counseled to “ride it out” when the value of our portfolio falls because, eventuall it will climb again.
So, if you’re investing over the course of ten years and you have some years where the market gives you a negative return, common wisdom states that it will correct if you just wait long enough.
That ideology works for you only while you’re still investing and still buying stocks over the course of those corrections.
One of the reasons this works in your favor is that you’re able to buy stocks during those bear market years and those purchased stocks have the ability to grow in value when the stock market bounces back. It’s then that the value of your holdings increases because the money you spent when prices went down was able to get you more assets. When you’re in the investment stage, it won’t matter if the bear market comes early on or later because the average rate of return over that ten year period will be the same.
However, what happens when you retire in a bear market?
That’s where you face the sequence of returns risk.
The performance of the stock market in the first 5-10 years of your retirement is going to determine how long your retirement investments will last- so that is where this risk comes from.
Once you stop investing money and buying new stocks, you depend on the value of what you’re selling.
In a bull market, you can sell a set number of stocks to cover a year’s worth of income and still have plenty left in your portfolio that will continue to increase in value.
In a bear market, you’ll have to sell more stocks to get that same amount of income. Once the stocks are sold, they’re gone and they won’t be able to gain any more money for you once the market goes back up.
Even though the holdings that you have left can rebound, when there’s a bear market early it can reduce the amount of stocks you own to a point that you don’t ever make it back to where you were before.
Unfortunately, we have no say over what the stock market does in the first five years of retirement and a lot of that rests on “luck” as some would call it.
I’m not a fan of leaving my clients’ money in the hands of luck.
That’s why I make sure we look at options that don’t have to be tied to this kind of risk. You need a secure income plan just in case there is a bear market that hits in your first few years of retirement. It’s something everyone really should consider.
If you retire in a bear market you need to be able to leave the large majority of your stocks alone until the market bounces back.
It's important to make a retirement plan that mitigates this risk.
When you retire, you need to be set for the first five years no matter what the stock market does. There are options for creating a plan that will carry you forward if you retire in a bear market. If you didn’t know that this is a possibility, you couldn’t plan for it. I want you to be prepared! It’s my mission and I’m taking it seriously.
If you’d like more information, feel free to schedule a 15 minute chat with me to discuss you options today!