Thinking of Retiring? You Need to Understand Sequence of Returns Risk.April 6th, 2016 by Anchor Bay Capital's Investment Team
This is the year! If you have your calendar marked and you are counting down the days to walk out the door, you undoubtedly have a rock solid income plan for retirement. You may have a pension and social security, you may be counting on personal savings, or you may be excited for the next venture or part-time work. Regardless of your income plan, it is important that you understand how the sequence of market returns will affect your money.
Let’s say that you are on top of a mountain road and starting the long descent down. You begin slowly, and carefully wind your way around the switchbacks. Making your way down the hill will take a while, but you will arrive safely and you know that you are safe because you have control of your speed. All of a sudden, the worst happens! Your brakes begin to go out! Now the control that you had over your speed is gone. Navigating this descent is much trickier and arriving safely is a major concern that you are completely unsure of.
Coming down the mountain is kind of like retirement. If you begin taking money out of your portfolio, you have started the descent. Your withdrawals can be controlled with a rate that will make your money last and help you arrive safely at the end of your retirement. However, what if your portfolio experiences a sequence of negative market returns just as you begin your retirement? This can have a major impact on how long your portfolio lasts since the timing of market losses is a key factor. Think of it this way, would you rather have your brakes go out at the top of the hill or the bottom of the hill? The concept is the same with your money. If you experience positive market returns early in retirement you should have the stability to manage negative market returns later in retirement.
As I write this, the major stock market indexes have experienced large waves of volatility year to date. Does this mean that you shouldn’t retire? No, that is not what I am saying. It is important to be aware of sequence of returns risk so that it can be managed. It starts with having that rock solid retirement income plan I mentioned before! Here are some key items to consider for your income:
- Stay Invested. At Anchor Bay Capital, we believe in remaining invested in stocks throughout your lifetime. We feel that this is an essential way to keep up with inflation and longevity.
- Allocate your investments for income. Building your portfolio with consistent dividend paying stocks and quality fixed income will help you maintain your withdrawal needs.
- Reduce your basic expenses as much as possible. Review your retirement budget for excesses that are unnecessary. Take advantage of living your dreams while you are healthy and able, but also plan excessive spending for when your portfolio returns can handle it.
- Evaluate your guaranteed income options. Creating a stable paycheck that will cover basic expenses can give you predictability while your stocks have time to overcome any volatility.
- Stress Test your plan. Part of our planning at Anchor Bay Capital involves running an analysis of 1000 different market situations to see the probability of your money lasting for your goals. Having a plan that is tried against various scenarios is essential as you start your retirement.
Want to discuss this more? We are happy to provide guidance and assist you in gaining 100% confidence in your retirement plan. Reach out to us anytime.