By Yvonne Marsh, CFP®, CPA
Imagine the markets decline 15% on your first day of retirement! Your $500,000 nest egg is now worth $440,000. You will need an almost 18% rebound to recover.
What if the opposite were true? The markets increase 15%. Your $500,000 is now worth $560,000.
In retirement, you can do everything right – you save diligently, work with a fiduciary advisor, focus on low fees and tax efficiency – but market corrections early in your retirement years can dramatically alter the ability of your money to last your lifetime. Called Sequence of Returns investment risk, it’s the luck of the draw and can devastate your best laid plans. Few investment professionals talk about or even understand it.
For example: John and Sue retire at age 65 with $500,000 in identical balanced portfolios and plan to withdraw $25,000 annually, adjusted for 3% inflation. John retires as the markets go down. He averages an 8% return but runs out of money by age 83. Sue retires in a market rally. She averages the same 8%, with her corrections coming in later years. Her portfolio at age 90 is $1.6 million. Why the disparity? Markets don’t give averages; they give you actual returns that work out to an average. The order in which you earn that average matters!
What’s a retiree to do? Work with a fiduciary to structure your investments according to time and purpose. Invest conservatively for assets needed earlier. Invest for growth with assets needed later. Typically advisors simply invest by account type: IRAs one way and brokerage accounts another way. This simply does not mitigate Sequencing Risk.
Secondly, have enough guaranteed income to meet your basic needs. This gives you the flexibility to wait out a down market. If Social Security isn’t enough to do that and you don’t have a pension, create your own pension annuity with a highly rated insurance company. Many new income opportunities exist today that didn’t exist 10 years ago.
Your early retirement years define your later retirement years – all due to the unknowable Sequence of Returns risk. Take the steps today to protect your tomorrow. Give us a call to learn more.
Marsh Wealth Management, LLC
504 Ebenezer Road
Knoxville, TN 37923
865.622.2162
Financial Planning & Investment Advisory Services are offered through Marsh Wealth Management, LLC (“MWM”), an independent investment advisor registered with the state of Tennessee. Yvonne Marsh is an Investment Advisor Representative of MWM in the state of Tennessee. Marsh Professional Group, LLC, is a TN registered public accounting firm and a separate legal entity from MWM. For a detailed discussion of MWM and their investment advisory fees, see the firm’s Form ADV on file with the SEC at www.adviserinfo.sec.gov.