Timing is Everything…
History tends to repeat itself, and when the market struggled this summer and the Federal Reserve cut interest rates, an all too similar fear began to sneak back into investor’s minds… Market meltdowns are always unsettling, but for investors who are on the cusp of retirement, they can be absolutely terrifying.
People work their whole lives, plan for every dollar, and obsess over every detail to ensure their retirement is secure and stress-free. But, believe it or not, you don’t have as much control over your retirement as you might think. Yeah, you get to choose where you’re going to vacation, what course you’re going to play golf at next, and what movie you’re going to see… but what you can’t control is what the market does next!
At retirement, an investor’s peak earning years are generally behind them and consistent contributions to their portfolios is no longer a thing. Retiree’s will now be entering into their “withdrawal phase” and will be using their portfolio’s as a source of income to fund their post-career lifestyle and day-to-day needs. This draw down phase is called the sequence of returns. In a healthy, thriving market, a portfolio that is supporting withdrawals for a retiree would not be of concern. However, if the market produces a series of negative returns, that same sequence of returns for a retiree can be devastating. Why?
Short answer: sequence of return, or timing. If the market performs negatively at the beginning of retirement, a retiree’s portfolio will obviously be punished. Adding to that punishment, if a retiree begins to take withdrawals, they are even furthering the depletion of their retirement funds. But it gets worse… The most painful consequences to this timing won’t be apparent until many years later, as the retiree’s portfolio struggles to regain lost ground.
Although no one can control time and the market, it is important to take these things into consideration when creating a plan for your retirement. Check out this article that takes a more in depth look at the sequence of returns and the impact that sequence has on your portfolio!
If you’ve never heard of the term “sequence of returns” or would like to see the impact that it has on your portfolio, please contact us! We are happy to help!