The Timing of Market Volatility Matters Most in Retirement

(don’t forget to checkout the video of this blog too)

This is one of the most important concepts to grasp in retirement planning.

Once you start taking retirement income the returns of your portfolio aren’t as important as the timing of when they occur (often referred to as the “sequence-of-return risk”).

If you see negative returns in the early years of retirement you are MUCH more likely to exhaust your portfolio in retirement.

It’s a strange phenomenon that occurs when you begin taking fixed income from a volatile asset (like the market).

You see it’s the volatility of the market that makes it an effective long-term growth vehicle, but once you start taking income, everything changes…

Scenario 1: Market Drops in the early years of retirement

Imagine you have $500k and you’re taking a 4% annual withdrawal as your income in retirement.

That means you have $20,000 per year of income with a 90% success rate of that income lasting for life.

Now imagine the market dips 35% like it did in 2008.

Now your portfolio is only worth $320k.

But you still need $20,000 per year of income…

So instead of taking a 4% withdrawal you have to take more than 6% per year!

This decreases your retirement success rate to 50%.

You also need a 54% return just to get your original principal back to even.

This puts you behind the 8-ball immediately with a much higher risk of running out of money in retirement!

Scenario 2: Market Drops in the later years of retirement

This has much less of a negative effect if it happens later in retirement…

That’s because your portfolio doesn’t need to last as long (since you’re older & have less years of retirement remaining).

You’ve also likely seen some growth in your portfolio and therefore have a larger balance to support your income withdrawals.

So your $500k portfolio might be worth $800k at this point.

That makes taking $20,000 per year a much safer income withdrawal.

It’s just crucial that your principal remain in-tact in the early years of retirement so that it can continue to generate income for the duration of your retirement.

Even if you average 12% annual returns throughout retirement you can still exhaust your portfolio with bad market timing!

That’s why utilizing guaranteed income through the right type of income annuities can be an optimal strategy (and this can be done 10–15 years out from retirement with some very significant, guaranteed growth of your income).

Ensuring that some of your retirement income is NOT susceptible to down markets allows you a predictable stream of income, but better yet, it allows the remainder of your retirement assets to truly participate in the long-term growth potential of the market.

The best of both worlds!

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