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Managing Sequence of Returns Risk in a Down Market

Have you seen the news headlines lately? “Stocks and Bonds Are Down”, “Inflation is High”, “2022 Is a Dangerous Time to Retire”.

Lots of scary stuff. But is all of that really true? Is this really a dangerous time to retire? Well, stocks have been volatile for sure, and bond values have come down as interest rates have risen. Those are all known facts. And the logic here is that if your portfolio is down in value, taking money from that declining portfolio is a risky move that can have dire consequences. That risk has a name: it’s called Sequence of Returns.

Taking money from investments that are declining in value, especially when they happen early on in your retirement, puts a lot of stress on the longevity of your nest egg.

But you also need the money to live on – and maybe most or all of it is in the stock market! What do you to manage sequence of return risk in a down market?

A risk management strategy may be able to help

This is where a risk management strategy may be able to help. We are talking about a type of strategy that provides you with the cash flow you need in the short term from a non-volatile source, while at the same time giving your investments the time they need to potentially recover.

Our term for this is called Buckets, where we take the income you need today, tomorrow, or even five years from now, from non-volatile sources when the markets aren’t cooperating. This gives them time to recover, and potentially protect your income in future years.

All About Bucket 1

Bucket 1 – your income bucket – is shielded from the whims of the stock market, so it cannot lose significant value when stocks are in a negative cycle. The types of Bucket 1 assets I’m talking about here include things like cash, maybe laddered short-term bond funds that are less affected by rising interest rates, and in some cases fixed annuities or fixed indexed annuities – which, by the way, have seen a rise in rates over the past few months.

How “long” your Bucket 1 should be really depends on your own personal risk tolerance. Some people think only one or two years’ worth is sufficient, but we think that’s far too short, given that the average bear market since 1928 has lasted 21 months (Source: American Century) with a nearly 40% peak-to-trough decline. A better length of time is probably between five and seven years. Remember, we’re trying to buy enough time for the market to both drop AND to recover to its previous levels. If you retire just as the market has peaked, you may very well need at least that much time, if not more.

The whole point here is that there’s no way to control the stock market, and while you may be able to have some control over your retirement date, that’s not always the case. If you retired in January of this year, and you’re selling stocks in a down market to pay your regular living expenses, you could be in a world of hurt. Better to have a strategy in place that anticipates the market downturns no matter when they may happen; one that provides the cash flow you need to ride out the storm.

If you’re nearing retirement and you need some guidance on what to do, or even if you just retired within the past few months and still need to put a strategy in place, we do this kind of planning every single day at Lucia Capital Group. Just give us a call and we’ll take it from there. As always, we’re here to help.

Important Information:

The information provided should not be considered specific tax, legal, or investment advice and is not specific to any individual’s personal circumstances.

Different types of investments and/or investment strategies involve varying levels of risk, and there can be no assurance that any specific investment or investment strategy will be profitable for a client's or prospective client's portfolio, thus, investments may result in a loss of principal. Accordingly, no client or prospective client should assume that the information presented serves as the receipt of, or a substitute for, personalized advice from Lucia Capital Group or from any other investment professional.

You should always seek counsel of the appropriate advisor prior to making any investment decision. All investments are subject to risk including the loss of principal. This material was gathered from sources believed to be reliable, however, its accuracy cannot be guaranteed.

The information contained herein does not constitute an offer to sell or a solicitation of an offer to buy securities. Investment products described herein may not be offered for sale in any state or jurisdiction in which such an offer, solicitation or sale would be unlawful or prohibited by the specific offering documentation.

It is important to keep in mind that investments in fixed income products are subject to liquidity (or market) risk, interest rate risk (bonds ordinarily decline in price when interest rates rise and rise in price when interest rates fall), financial (or credit) risk, inflation (or purchasing power) risk and special tax liabilities. Interest may be subject to the alternative minimum tax.

Before investing, carefully consider a mutual fund’s investment objectives, risks, charges, and expenses. To obtain a prospectus or summary prospectus, which contains this and other information, call your financial advisor. Read the prospectus carefully before investing

Insurance services offered through LPL Financial or its licensed affiliates. CA Insurance Lic. #0518721

Annuities are long-term investment products designed for retirement purposes. Guarantees are based on the claims-paying ability of the issuer subject to their terms and conditions. Early withdrawals may be subject to surrender penalties and, if taken prior to age 59½, may be subject to an additional 10% federal tax. Annuities are not FDIC insured. Certain terms and conditions apply, so please read insurance company materials carefully.

Fixed index annuities are complex, long-term investments designed for retirement purposes. Guarantees are based on the claims paying ability of the issuer subject to their terms and conditions. Generally, returns are based on a market index and are limited such that an investor does not fully participate in market performance. Withdrawals may be subject to surrender penalties or foregoing benefits if withdrawn prior to the contract term. Investors should speak with a financial professional about the contract’s features, benefits, risks, and fees, and whether the contract is appropriate for the investor based upon his or her financial situation and objectives. Withdrawals prior to age 59 1/2 may be subject to a 10% penalty tax in addition to income tax. Annuities are not FDIC insured. Certain terms and conditions apply, so please read insurance company materials carefully.

Rick Plum is a registered representative with, and securities and advisory services offered through LPL Financial, a registered investment advisor and member FINRA/SIPC. The investment professionals are affiliated with LPL Financial and are conducting business using the name Lucia Capital Group, a separate entity from LPL Financial.

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