It’s happening right now. Just as many embarked on “The Great Resignation,” the market decided it didn’t like the current economic conditions. And with that, those about to retire may be rethinking their decision to leave the workforce.
It is a form of risk that has made its way over the past few years. At first, it was talked about as a simple theoretical conjecture. However, recent events have made the risk of “sequence of returns” a reality.
“Sequence of returns risk refers to the order in which market returns arrive when retirees spend from a portfolio in retirement,” says Rob Stevens, head of financial planning at TIAA in Charlotte, Massachusetts. North Carolina. “Negative returns early in retirement will increase the percentage of remaining assets withdrawn to maintain the desired level of income. While equities have historically done very well – around 10% per year on average for nearly a century – if there is a market correction early in retirement, a retiree’s income security may be considerably reduced.
You have been told all your life to overcome the inherent ripples of the market. Why is the volatility different now that you are about to retire compared to ten or twenty years earlier?
Nicole Riney, vice president, financial planner at Oak Harvest Financial Group in Houston, says, “The sequence of returns is a term used by financial professionals to illustrate what can happen in an investment portfolio when the market experiences two years of decline during the first two years of retirement. Once a retiree stops collecting a paycheck and begins to rely on their investment account for income, they are more susceptible to this risk. If the market is down and you now have to sell positions to generate income, you are forced to sell at a loss and therefore you deplete your funds much faster. And if you have to make that hard sell two years in a row, it could be the difference between running out of money and not running out of money for the rest of your retirement.
There are clear strategies to protect you from pre-retirement sequence risk. But what if it’s too late. What can you do if you find yourself unprepared for your retirement date and the market decides to take a dive? Can you do anything to recoup these losses?
“The fastest way to recover is to stop withdrawing,” says Anthony Martin, CEO of Choice Mutual in Reno, Nevada. “That could mean going back to work or postponing retirement, if possible. Access to other funds, such as home equity, can also help. »
It’s important for you to remember that you should also treat your portfolio the same way you did ten or twenty years ago. Chances are you will live much longer past your retirement date. This means making sure that at least part of your retirement savings continues to grow. The last thing you want to do is make an impulsive decision that jeopardizes your future.
“A sensible approach is to maintain a long-term perspective,” says Tyler Papaz, director of private banking at Cornerstone Advisors Asset Management in Bethlehem, Pennsylvania. “Pressing the panic button and moving everything into cash when the market is down often leads to missing the upside rally. A long-term perspective and appropriate asset allocation can go a long way in managing periods of heightened volatility or negative returns.
When the market falls in the first year or two of retirement, the risk is not short term. You will have enough money to fund those early years of retirement, even if you sell securities at prices lower than expected. The challenge will come in the following years. You are now working on a smaller base to grow. You do have options though. And they might surprise you.
“One possible approach is to take on more risk in your investment portfolio,” says Linda Chavez, founder and CEO of Seniors Life Insurance Finder in Los Angeles. “Although it may seem counterintuitive, it can help you recover some of the losses caused by the sequence of return risks. This can include increasing your exposure to stocks and other investment vehicles to high risk or transferring some of your funds from traditional savings accounts to these more aggressive options.Of course, this approach is not without risks and you should always consult a financial advisor before making any major changes to your investment strategy, but if you’re comfortable with the idea of taking on more risk, it can be an effective way to offset the negative effects of sequence risk.
Remember, as Chavez says, there is very real risk in investing aggressively. If you overdo your aggressiveness, you risk making things worse. Don’t worry though. There is an alternative.
“Trying to recover from negative market returns in retirement can be dangerous, as it can lead investors to take on more risk to recoup losses in their portfolio,” says Michael Fischer, director and wealth advisor at Round Table Wealth Management in Westfield, New Jersey. . “Portfolio construction is key as you approach retirement, and the portfolio should be stress tested to understand the impact of negatively sequenced returns in early retirement. One strategy to help the recovery is to reduce discretionary spending in early retirement, especially if markets are negative. This may mean foregoing vacations or cutting entertainment expenses in the short term, but in the longer term, temporarily reducing those expenses will allow for greater flexibility later in retirement.
Reducing activities and other expenses may not be in the cards for some. This, unfortunately, leaves them with little choice when it comes to overcoming short-term losses just as retirement begins: they face the daunting prospect of not retiring.
“Once retired, it can be very difficult to recover from the streak of return risk, as people no longer work and save money, but now turn their savings into income,” says Sean Rawlings , adviser to Battock Wealth Management Group in Scottsdale, Arizona. “Unable to allow time to recover their assets, retirees often have to return to work or live with less income if they do not want to risk running out of money. That’s why having a volatility buffer is essential when planning for retirement income. Retirees need to be able to weather the storm for a short time. »
Typically, it takes about two years for stocks to recover from a bear market. In the most pessimistic case, you are looking at five years. In either of these scenarios, however, recovery is something to look forward to. This means it’s essential that you stay cool in the worst of times.
“Keep your emotions out of your decisions,” says Greg Womack, president of Womack Investment Advisers, Inc. in Edmond, Oklahoma. “Review your portfolio and determine which stocks will help you the most. Stay focused on the strength of the markets.
Don’t panic and focus on things within your control. Maybe you’re not starting your retirement with the success you hoped for. Maybe you go slower at first. Get the lay of the land. Find cheaper substitutes and see if they suit your needs.
“Overall, what you need to do to recover from the back risk streak is to minimize your expenses and withdraw as little money as possible from an account that has gone down in value,” says Jeff Kronenberg, founder and president of Imagine. Wealth Group in Ridgefield, Connecticut. “Theoretically, you could also consider taking on more risk for a potentially higher return, although this is obviously not an ideal situation.”
The harsh reality is that you “spend less, save more, or earn better portfolio returns,” says Brian Haney, founder of The Haney Company located in Silver Spring Maryland. “Those are the only three options and sometimes it’s a combination of them depending on how low your assets are.”
Don’t let the market dominate your destiny. You control your own destiny.