To avoid running out of money in retirement, you must protect your wealth against market volatility and "sequencing risk."
One of the most significant risks to retirees' nest eggs is that timing withdrawals from your retirement account could negatively affect your overall returns. Lower-than-expected returns will then increase your chances of a shortfall in your retirement income. Receiving distributions from your retirement savings during a bear market is much costlier than taking out money during a bull market. Losing money in a bear market could cause you to deplete your retirement accounts much sooner than planned.
The sequence of returns risk, also known as the sequencing risk, owes a lot to timing and the luck of the draw. It's not always possible to choose the perfect time to retire, especially given the unpredictability of the stock market and unexpected personal circumstances. Sequencing risk will be an issue for nearly every retiree, although diligent planning has the power to buffer many of the adverse outcomes of that risk.
Can your portfolio weather much volatility?
Retirees and their income and retirement planners use many approaches to manage the sequence of returns risk. One method is to make drastic reductions in spending. Unfortunately, reducing expenses in this manner often equates to unpleasant downgrades to your lifestyle. Still, cutting expenditures may be the only course of action for a portfolio that has not been correctly "de-risked." Barely scraping by, though, is not palatable to most of us. When you have a portfolio with zero volatility, you have no sequence of returns risk. That's why, if you want to maintain your current lifestyle when you no longer work, you must consider re-assessing your current investment matrix and reducing volatility as much as possible.
What products help reduce the impact of a down market?
Average annualized equity market returns earned after retirement are critical to your retirement portfolio. So-called "safe money" products, including certain annuities, bonds, and life insurance, may effectively armor your nest egg against the effects of market volatility. For instance, because they don't correlate to the stock market, income annuities are often used to mitigate the sequence of returns risk. Adding an annuity to create a predictable income stream can help reduce the strain of withdrawals on your retirement accounts.
What is the rising equity glide path technique?
Another volatility reduction technique retirees may incorporate into their planning is a "rising equity glide path." In a rising equity glide path, you begin your retirement with a lower allocation of equities than is usually recommended by planners. You then slowly increase that stock allocation over time. The equity glide path method might reduce your vulnerability to stock market declines that tend to be most harmful in the early retirement years.
Other ways to mitigate volatility
Your financial advisor may also suggest products such as financial derivatives or income riders to help you avoid a sequence of returns risk.
These products create a floor for how low your portfolio can fall, although you will likely sacrifice some potential upside.
The last word. It's nearly impossible for anyone to time the market or predict the economy's trajectory. That's why even well-planned retirees may retire during a bear market. Market volatility, especially in the early years, could force you to deplete your savings more quickly than anticipated. The sequence of returns risk is a genuine threat to your retirement income. It would be best if you had a plan for sequence risk, or you could run out of money before you die.
If you are a retiree or pre-retiree, you should always seek the advice and guidance of a competent advisor experienced in the distribution phase of retirement. It is possible to take measures to ensure more significant degrees of protection for your wealth. Your retirement income planner will help you discover the best ways to protect your portfolio from market mood swings and ensure your money lasts as long as needed.
If you'd like a confidential review of your current retirement plan, please get in touch with me and set up an appointment. It's always possible to do things to make your retirement more prosperous, less stressful, and more enjoyable.