Your Retirement: Leave luck out of it.
Any retiree's greatest fear is running out of money. If you don't want your retirement security to be determined by chance, you must protect yourself from a risk that is potentially scarier than inflation or taxes: the sequence of returns risk.
Coping with the market's unpredictability can be difficult for any investor. No one wants to see their portfolio eroded by a quick drop or long-term slump, regardless of their age or financial objectives. A market fall, however, can be especially painful for those who are nearing or have recently retired and anticipate drawing a portion of their income from their investments.
Remember that when you're nearing or in retirement, you have less time to recover from a significant loss. And if you withdraw money from a depleted retirement account—one to which you no longer contribute—you risk depleting your funds faster than expected.
This dreadful (and frequently neglected) retirement danger is known as the "sequence of returns risk." In essence, it is the risk that fate will deal you a bad hand just because you chose the wrong moment to retire. If your stocks are at a low due to a correction or crash, and you are compelled to sell more shares to make the same amount of income, your portfolio's lifetime may be dramatically reduced.
Reduce your exposure to volatility
As retirement approaches, it's common to become a bit of a statement stalker, reviewing your portfolio's performance on a daily basis and applauding it every time your balance rises. When you're getting excellent outcomes, it's natural to want to remain with a riskier portfolio mix. But it's equally crucial to understand what could happen if you don't secure your money. "The single greatest method to multiply capital is to prevent significant losses," Warren Buffett once observed.
As you get closer to retirement, your financial adviser can help you develop a more diverse portfolio of stocks, bonds, and alternative investments based on your goals, savings, and risk tolerance.
Rethink your withdrawal strategy
You've probably heard of the "4% Rule," which claims that retirees can lessen their risk of running out of money by removing 4% of their portfolio each year, adjusted for inflation. Many financial experts, however, have warned that the 4% rate, which is based on studies from approximately three decades ago, is no longer appropriate for current investors in a low-interest environment. You might wish to develop a more tailored and/or flexible withdrawal strategy.
Look at income-producing investments
If you intend to use your investments to supplement your retirement income, you should consider shifting at least a portion of your portfolio to solid income producers. These could include dividend-paying equities, annuities, bonds, alternative investments, or even rental property.
Develop a bucket strategy
Another strategy for ensuring you have enough money now and in the future is to divide your savings and investments into three "buckets" meant to serve you in three stages of retirement—now, soon, and later.
The "now" bucket would cover any living expenses — as well as greater emergency bills — you may incur during your first few years of retirement. It could contain safe, easily accessible investments like cash, cash equivalents, and/or fixed-income investments.
The "soon" bucket would save money for a few years in the future. It would include some less risky investments as well as certain equities for growth.
The "later" bucket would cover your costs much later in retirement, and it might also create a legacy for your loved ones if that is a goal for you. Because it is designed for long-term growth, the later bucket may contain a higher percentage of stocks, depending on your risk tolerance.
You may find one or a combination of these strategies can help you improve your “luck” when it comes to dealing with a sequence of returns risk.
If you have any questions about your current portfolio or how to diversify it in preparation for retirement, let’s talk. You can reach me at 705.527.2006 or brenault@liahona.ca
