The Retirement Risk Most Investors Don't See Coming
What is the biggest investment risk you face when you retire?
If you ask most people that question, you'll probably hear one of three answers:
Inflation. Taxes. Or a stock market crash. All three deserve attention.
But there is another risk that doesn't always receive enough attention:
The timing of your investment returns.
Two retirees can have the same average return and very different results
Imagine two people each retire with $1 million. Both withdraw $50,000 a year.
Both earn the same average investment return over a 20-year period.
You might assume they would end up in roughly the same place.
Not necessarily. If one person experiences several poor investment years immediately after retirement while the other experiences those poor years later, their results can be dramatically different.
Why? Because the first retiree is withdrawing money while the portfolio is declining.
That's sequence-of-returns risk.
Why does this matter?
During your working years, a market decline can actually be helpful in one respect.
You're still earning income. You're still contributing to your investments.
You have time. During retirement, you may be doing the opposite.
You're taking money out. That's why retirement requires a different conversation about investment risk.
What can be done?
There are several ways to address the problem. You can structure your portfolio differently.
You can maintain reserves. You can coordinate portfolio withdrawals with other sources of income.
And, depending upon the circumstances, tactical strategies or guaranteed income products may have a role.
There isn't one answer that is right for everyone. That's why I believe the conversation should begin with the financial plan rather than with a particular investment product.
A question worth asking.
If the market declined significantly during your first two years of retirement, would your financial plan still work?
If you're not sure, that's a good reason to take a closer look.
A Smart Moment takeaway.
Retirement risk isn't just about how much money you have.
It's also about when you need that money and what the markets are doing when you need it.
Understanding that distinction can make a significant difference in how you approach retirement planning.