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

Have you thought about what would happen if the stock market took a big downturn just as you began taking money from your portfolio in retirement? For those who are newly retired, down markets can be especially painful – sometimes even lethal for their portfolios. And there’s actually a name for this kind of scenario: 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 big market downturn happens later in retirement, it’s not quite as bad, the portfolio potentially went up instead of down even after taking distributions. But we can’t control the next “sequence”. And early on, that 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.  

Delay the Date of Your Retirement

One option is to try to delay the date of your retirement. But that’s probably not what you’d call 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 set that one aside. 

Adjust Your Income Strategy

You could instead opt to simply settle for lower or even no income during the years when the market is in a downturn. But this is another bad idea, in our opinion and we don’t think you should let the stock market dictate how much money you have to take a vacation, visit the grandkids, or make sure your mortgage gets paid.  

Segment Your Assets

A much better idea, we think, is to portion off anywhere from five to seven years of non‐volatile assets from your portfolio – by that meaning, assets not affected by the stock market – and use those funds for income. You can then place another chunk of money in medium‐term assets, which can be exposed to more risk, but also still potentially giving 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.  

This is a simplified version of what we call a Buckets Strategy, where the goal is to take your income from non-volatile sources when the markets aren’t cooperating, giving them time to recover, and potentially protect your income. 

So the issue here really isn’t about retiring “at the wrong time.” Instead, it’s more about setting up your distribution strategy from your portfolio. It’s all about managing your future, where the goal is to get your money to live longer than you do. And that just happens to be our goal, too. You want some help with this?  It’s what we do every single day. Just give us a call; we’re always here for you. 

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. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual 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 (including the investments purchased and/or investment strategies devised by Lucia Capital Group (“LCG”)) will be either suitable or 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 presentation (or any component thereof) serves as the receipt of, or a substitute for, personalized advice from LCG 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.

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. Treasury securities are backed by full faith and credit of the U. S. Government but are subject to inflation risk.

Examples cited are hypothetical, are for illustrative purposes only, are not guaranteed and subject to potential federal and state law amendments. There is no guarantee that you will achieve the results discussed or illustrated.

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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