Sequence-of-Returns Risk: What If You Retire at the Wrong Time?

What happens if the stock market takes a big downturn just as you retire and begin taking money from your portfolio? With all of the recent market volatility, this possibility is on a lot of people’s minds right now. For new retirees, down markets can be especially painful—sometimes even proving lethal to their portfolios. And there’s actually a name for this danger: it’s called sequence-of-returns risk.

Simply put, if you see big losses in your portfolio early on in retirement while you’re also taking withdrawals, you’re reducing the number of assets available to you if and when the market eventually recovers. If the market takes a big downturn later in retirement, it’s not quite as bad. This is because you’ve got a shorter life expectancy and your money doesn’t have to last quite as long. But early on, it can mean big trouble.

So what can you do about it? Naturally, you have no control over things like a falling stock market, bond yields, or inflation. But you do have options—some good, some not so good.

One option is to try to delay the date of your retirement. However, it’s not an attractive option. And in many cases, you don’t have control over that anyway (because you get laid off, you can’t physically work anymore, or the mental toll is just too much). So let’s forget that one.

Another option is to simply settle for lower income during the years when the market is in a downturn. This is another bad idea in our opinion. You shouldn’t let the stock market dictate how much money you have to take a vacation, visit the grandkids, or make sure your mortgage gets paid.

A much better idea, we believe, is to portion off anywhere from five to seven years of non‐volatile assets (assets not affected by the stock market) from your portfolio and use those funds for income. Another chunk of money can be placed in medium‐term assets, which can be exposed to more risk but also give you some measure of relative safety. The remainder can go into longer‐term assets, like growth and value‐oriented stocks. Because this money doesn’t need to be tapped for 15 years or more, the inherent risk may be mitigated over the course of many years.

So the issue really isn’t that you need to worry about retiring “at the wrong time.” Instead, put thought into setting up your distribution strategy. It’s all about managing your future, where your goal is to get your money to live longer than you do. That’s our goal, too. Just give us a call; we’re here for you.

Information presented should not be considered specific tax, legal, or investment advice. 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. Diversification does not guarantee a profit or protection from loss.

No client or prospective client should assume that the information contained herein (or any component thereof) serves as the receipt of, or a substitute for, personalized advice from Lucia Capital Group, its investment adviser representatives, affiliates or any other investment professional.

Raymond J. Lucia Jr. is chairman of Lucia Capital Group, a registered investment advisor and CEO of its affiliated broker-dealer, Lucia Securities, LLC, member FINRA/SIPC. Advisory services offered through Lucia Capital Group. Securities offered through Lucia Securities, LLC. Registration with the SEC does not imply a certain level of skill or training.

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