Nobody can control the timing of a downturn in the market. Market downturns are inevitable and are a part of the normal economic cycle.
The biggest challenge retirees face is the order of gains and losses within their retirement savings accounts. This is referred to as Sequence of Returns risk. Sequence of returns risk is the danger that the timing of withdrawals from retirement accounts will have a negative impact on the overall rate of return available to the investor.
Let me lay this concept out…
Say you retire next today. The money in your investment accounts needs to last as long as you live. Controlling your risk becomes more important as you will be making regular withdrawals now, instead of regular contributions.
A month after your big retirement party, just as you are packing for the planned trip you’ve dreamed of, the market goes into a sudden downturn.
Rather than the market rallying higher within a few months, as it did early 2019, the market sinks into a period of loss, and for 12-18 months there is no significant bounce.
As a new retiree, you are no longer earning income from your job. You rely on withdrawals from your investment portfolios!
With the market in a downturn… you see… you’re cashing out stocks that are trading below their previous levels. If they are worth less than you paid, you are locking in more losses. Perhaps even more serious, you NOW have a lower overall value within your account, leaving you with less ability to take advantage of compounding (which is one of the keys to generating returns).
THIS is the problem with sequence of returns risk. If the market produces negative returns for a prolonged period of time in early retirement, or even for several shorter periods of time, it will do serious damage and reduce the amount of income the portfolio will generate throughout the rest of your life.
If you’d like to learn how you can protect yourself from this risk, head back to our channel and look for the video with their title!