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SAMPLE: Does Your Retirement Plan Rely Too Much on Luck?

How to Protect Your Nest Egg from Sequence of Returns Risk

When you’re close to seeing the benefits of your retirement plan, don’t leave your money up to chance. Good planning is the key to protecting your money from risk and making sure bad luck doesn’t have a big impact on your future.

“Sequence of returns risk,” – that is, the possibility that market declines can reduce the longevity of your portfolio – can be a scary retirement threat to contend with. If your stocks are low because of a crash or corrections, and you have to sell more shares than you planned for to break even on income, your retirement account could deplete faster than you planned. It can be hard to recoup that loss and recover as quickly as you may need to.

An Example: Two Friends, Two Retirement Plans

To showcase how sequence of returns risk can play out in retirement plans in real life, consider the case of two friends, Jason and Jenny, who each retire with $1 million in the bank.

They both decided to withdraw $60,000 annually from their accounts. The only difference? Jason decided to retire in 2000 and Jenny waited until three years later. Unfortunately for Jason, that timing meant he retired just as the market was experiencing a significant downturn. Right from the outset, he experienced big losses in 2000, 2001 and 2002. He averaged a healthy 4.96% rate of return through the years but because he couldn’t recover from those initial losses, he ran out of money just 15 years after retirement. Bad timing meant bad luck.

Jenny, on the other hand, got off to a much stronger start when she retired in 2003. She experienced the same 4.96% rate of return as Jason did, which meant that when she experienced losses, her portfolio held up quite well. At 18 years after retirement, Jenny still had $940,749 in her account.

There isn’t any way to predict what the stock market will do in the short-term or the long-term but, thankfully, there are certain strategies that can help protect your money from bearing the brunt of bad luck.

Minimize Your Exposure to Volatility

Keeping close tabs on your portfolio can help you understand market fluctuations and it can be fun to celebrate every time your balance gets a boost. Sometimes a riskier portfolio mix can mean positive short-term results, but you also have to understand what could happen if you fail to protect your retirement plan.

Having a more diversified mix of stocks, investments, and bonds that align with your financial goals is a useful strategy. Partnering with your financial adviser to align your portfolio with your goals, how much you’ve saved, and your risk tolerance can help make sure you’re properly prepared for the years ahead. Make sure to partner with a retirement specialist who knows the difference between investing for decumulation and accumulation.  

Examine Your Withdrawal Strategy

Chances are you’ve heard of the 4% rule, a common assertion that retirees can reduce their risk of running out of money by taking out 4% from their portfolios each year, adjusted for inflation. Though there’s some wisdom in that steady approach, the research it’s based on is decades old and no longer applicable for modern investors in a low-interest environment. A more personalized and flexible approach to your retirement can help create a plan that works best for you.

Make Income with Investments

If your retirement income will come from your investments, switching a portion of your portfolio to reliable and trusted income producers won’t leave as much up to luck. Take a look at dividend-paying stocks, annuities, bonds, or even rental properties as ways to shore up your money-making strategy.


Pay Down Your Debt

Starting your retirement with a clean slate provides a strong foundation for the days ahead. Paying down your debt, including credit cards and other obligations, means you’ll have more flexibility when deciding how much you need to withdraw from your accounts if and when the market is down.


Bucket Your Budget

The concept of divide and conquer definitely applies to retirement planning. A great way to ensure you have money for both the short and long-term is to divide your savings and investments into three “buckets”—now, soon, and later—that can help protect you throughout your retirement years.

  • Your “now” bucket can cover any living expenses and larger emergency costs within the first years of retirement. It could hold safe, easy-to-access investments, such as cash, cash equivalents, and/or fixed-income investments.
  • The “soon” bucket can be set aside for a few years down the road. It could include some safer investments but also some equities for growth.
  • The “later” bucket can cover your costs much later in retirement. Because it’s made for long-term growth, this bucket could hold a higher percentage of equities, based on your personal risk tolerance.

Luck and Money: Reduce Your Risk

Running out of money is any retiree’s biggest fear but remember that you don’t have to leave your money and your future to dumb luck. Protect yourself from risk with a smart strategy and thoughtful planning so you can enjoy your down time without the worry.

For more information on protecting your portfolio from market losses and to speak with a fiduciary advisor about your retirement plans, contact <<Advisor’s Name or Company Name>> at our <<city, state>> office by calling <>, emailing <>, or to schedule a complimentary discovery call, use this link <> to find a convenient time on my schedule.

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