One of the biggest risks with a typical retirement portfolio is the stock market performing negatively or taking a nosedive in the early years of retirement.
The impact this has on the portfolio may not be recoverable for some. This is called the sequence of returns risk.
Many would agree that the stock market has grown over the long term, despite short-term volatility. We don’t know from year to year if the market will be up or down.
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If your retirement strategy includes withdrawing income from investment accounts that are going through a down cycle or a volatile period, especially in the early years of your retirement, that could become a big problem. A structured income plan helps mitigate this risk.
Invest for the long term, right?
Investment institutions across the land educate us to invest in stock and bond portfolios for the long term. We’re taught that the further we are from retirement, the larger the percentage we should allocate to equities and the smaller the percentage we should put in bonds.
As we get closer to or begin retirement, we’re taught to allocate less to equity holdings and increase bond or fixed income holdings. The theory is that this reduces your investment risk. But it also reduces your growth potential.
What if you need income on day one of retirement and your portfolio is in negative territory for the year and the market is volatile? Your portfolio is losing value and you’re told to withdraw income anyway.
Isn’t that the opposite of what we’ve been taught about buying low and selling high and investing for the long term?
The issue is that retirees need income this year and next year, and for the rest of their lives. Will the stock market be up when you retire and need income? Or down?
Somehow, the sequence of returns risk doesn’t get much attention. Being primarily invested in stocks and bonds is great when you have years for your accounts to grow and overcome short-term dips and market downturns.
However, problems tend to emerge when you have to rely on these investments to generate income early on in retirement.
Maybe you’ll get lucky
If the markets zoom up…
Read More: How to Reduce One of the Biggest Risks to Your Retirement
