sequence of return risk – Retirement Risk Advisors

Market downturn and your retirement portfolio

17May

Can Your Retirement Porfilio Handle a Drop In the Market?

BlogMay 17, 2023

Imagine you’re five years out from retiring. Your assets are performing great, and you get excited because you will have enough money to retire and travel like you’ve always wanted to!

Then a major drop in the market happens, taking with it your hopes of traveling and a good chunk of your retirement money.

This is what sequence of return risk looks like for many retirees.

What is Sequence of Return Risk?

Sequence of return risk is the risk that an individual may experience negative investment returns early in retirement, which can significantly reduce the value of their retirement savings and potentially lead to a shortfall in retirement income. This can occur even if the average investment returns over the course of retirement are positive.

To illustrate the impact of sequence of return risk, consider two retirees who have the same average annual investment returns of 6% over a 20-year retirement. However, one retiree experiences a period of negative returns in the first few years of retirement, while the other retiree experiences negative returns in the last few years of retirement. The retiree who experiences negative returns early on will have a much lower retirement income than the other retiree, even though their average annual returns were the same.

Risk Management:

Sequence of return risk is important because it can significantly impact a retiree’s financial security. If a retiree experiences negative returns early on, they may need to withdraw a larger percentage of their savings to maintain their desired standard of living, potentially depleting their savings too quickly. This can make it difficult to recover even if investment returns improve in later years. In contrast, if a retiree experiences negative returns later in retirement, they may have more time to recover from losses, as they will have already withdrawn funds from their portfolio.

There are several strategies that retirees can use to manage sequence of return risk, including:

Diversify your portfolio: Diversification can help to mitigate the impact of poor investment returns in any single asset class.
Consider a more conservative investment strategy: A more conservative investment strategy may provide more stability and reduce the risk of significant losses during market downturns especially as retirement gets closer.
Implement a withdrawal strategy: Developing a withdrawal strategy that takes sequence of return risk into account can help to ensure that retirees don’t withdraw too much from their portfolio early in retirement.
Use annuities: An annuity can provide a guaranteed stream of income, which can help to mitigate the impact of poor investment returns.
Consider working longer: Delaying retirement or working part-time in retirement can provide additional income and allow retirees to delay drawing down their savings until market conditions are more favorable.

inflation and interest rates on your retirement overview

11May

Retirement Planning: The Impact of Inflation and Interest Rates

BlogMay 11, 2023

Retirement planning is so much more than putting your money into a 401(k). With so few people spending the time they need on sitting down and planning their retirement, each day brings a new challenge or concern to the table. We are facing unprecedented times when it comes to traditional retirement plans. Retirements are being robbed because of financial risks that cause retirees to run out of money before they run out of retirement. And one of the biggest challenges is planning for inflation and interest rates. Inflation refers to the increase in prices of goods and services over time, while interest rates are the cost of borrowing money or the return on lending money. These two factors are closely related, and they can have a significant impact on retirement planning.

Inflation and Retirement Planning

Inflation is a key factor that can affect retirement planning. As prices of goods and services rise over time, the value of money decreases. This means that the amount of money you save today may not be enough to cover your expenses in the future. For example, if you save $100,000 today and expect to retire in 30 years, assuming an inflation rate of 2%, the purchasing power of that $100,000 would be equivalent to approximately $54,000 in today’s dollars.

To account for inflation, it is important to adjust your retirement savings goals to ensure that you will have enough money to cover your expenses in the future. This means that you may need to save more money than you initially planned. One strategy to combat inflation is to invest in assets that tend to increase in value over time, such as stocks or real estate.

Interest Rates and Retirement Planning

Interest rates are another important factor to consider when planning for retirement. Higher interest rates generally mean that your savings will grow faster, while lower interest rates can make it more difficult to reach your retirement savings goals. For example, if you invest $10,000 today in a savings account with a 1% interest rate, in 30 years, your investment would grow to approximately $13,400. However, if the interest rate was 3%, your investment would grow to approximately $24,000.

In addition to savings accounts, interest rates can also impact other types of retirement investments, such as bonds or annuities. In a low interest rate environment, these investments may not provide enough return to keep up with inflation. Therefore, it is important to consider the current interest rate environment when selecting investments for your retirement portfolio.

The Relationship Between Inflation and Interest Rates

Inflation and interest rates are closely related, and changes in one can impact the other. As mentioned earlier, inflation tends to lead to higher interest rates. This is because lenders need to charge a higher interest rate to compensate for the loss of value of the money they are lending. Conversely, if inflation is low, interest rates may also be low, as lenders do not need to charge as much to compensate for inflation.

When planning for retirement, it is important to consider the relationship between inflation and interest rates. If you are investing in assets that are sensitive to interest rates, such as bonds, you may need to adjust your investment strategy if interest rates rise or fall. Additionally, you may need to adjust your retirement savings goals if inflation is higher than expected.

Fear of RUnning out of money in retirement

18Apr

When Rest & Relaxation in Retirement Becomes Fear of Running Out of Money

BlogApril 18, 2023

Retirement is supposed to be a time of rejuvenation and relaxation, but for many retirees, financial stress can quickly turn it into a time of worry and struggle. One of the biggest concerns for retirees is running out of money. Unfortunately, it is a major issue, and it can happen for a variety of reasons.
The following are some common reasons retirees run out of money in retirement:

Insufficient Savings: One of the primary reasons retirees run out of money in retirement is due to insufficient savings. Many people don’t start saving early enough, don’t save enough, or don’t have a good understanding of how much they will need in retirement. As a result, they may end up with a retirement fund that is too small to last their entire retirement period.
Increased Life Expectancy: People are living longer than ever before, which means retirement savings must last longer too. Unfortunately, many people do not plan for an extended retirement period, and their savings run out before they pass away. This can be particularly challenging if they require long-term care, which can be very expensive.
Inflation: Inflation is a fact of life, and it can significantly impact retirees’ ability to maintain their standard of living. Many retirees are on fixed incomes and may not be able to keep up with the rising costs of goods and services. This can lead to a situation where they need to dip into their retirement savings to cover their living expenses.
Health Care Costs: As we age, health care costs tend to increase. These costs can be particularly challenging for retirees, especially those without health insurance. According to some estimates, a couple retiring in 2020 will need about $295,000 to cover their health care costs during retirement.
Poor Investment Choices: Investing is an essential part of retirement planning. Unfortunately, some retirees make poor investment choices or do not understand how to manage their investments effectively. This can lead to a situation where their retirement savings do not perform as well as they had hoped, and they run out of money sooner than expected.
Debt: Debt can be a significant problem for retirees. Those who carry debt into retirement may find that they need to use their retirement savings to pay it off. This can quickly deplete their savings and leave them without a financial cushion.
Running out of money in retirement is a widespread problem that can happen for many reasons. However, with careful planning and thoughtful decisions, retirees can reduce or even eliminate this problem. While there are many strategies that folks can take, the most important step is to plan properly and consider the risks facing your retirement.

07Dec

Keep Retirement Strategy in Mind This Holiday Season

BlogDecember 7, 2022

With the holidays rapidly approaching, a goal often set during these times is to diversify your retirement funds. With retirement investment there are two main focuses: investing/saving and distribution. During retirement you are at your most vulnerable financially because a regular paycheck is not coming in. It is the longest self-imposed period of unemployment most folks face. The following is fantastic advice for when you are trying to invest.

Your retirement planned around living and may seem expensive to support. Remember, roughly 55% of folk live beyond their life expectancy. So, it is important to plan for the long haul. A long-term investment sustains a better savings, but there are risks being found there. Short-term investments usually have higher yields. It is important to balance these.

Spending now can save more money for the long road. An example of this is withdrawing properly to avoid provisional income.

Be reasonable when it comes to expectations. Historical returns may not be what your portfolio does. Returns typically fall below the average. However, this can be balance with a diversification of accounts. Though we have historically low interest rates, this means bond returns will not impact retirement much. This will affect those who have retired most.

Heedless of where you are at in retirement planning, relying solely on plans that require higher returns is dangerous. If you expect to make more in the future, that means spending much more upfront. Stocks carry a higher risk than bonds, so they will yield higher return rates. Simply put: Spending more today and expecting higher returns in the future is risky business. The risks and consequences must be evaluated on a case-by-case basis.

Strategy should always be a top priority. Diversifying your retirement portfolio is just a start. Considering all the risks you will face in retirement is the next stop. Putting all your funds in one bucket will expose you to much more risk—taxable, tax-deferred, and tax-free. Integrate different approaches and accounts to combat inflation, tax rates, rate of return, and even long-term care.

12Apr

Market Volatility: Invest Smart, Know the Risks

BlogApril 12, 2022

Investing into the market for retirement funds is a risky business. Retirees often purchase individual stocks or invest in financial products such as mutual funds, exchange-traded funds (ETFs), or even variable annuities. There are other options such as defined contribution plans that invest into stock market and sometimes a company’s stock. 401(k)s are a common option offered by employers with a matching percentage. Having various investments allows for a more diversified portfolio, leading to a better chance at the safe and secure retirement you have always dreamt of.

However, invest smart and know the risks: the financial markets have significant fluctuations. There is a huge chance of majorly reducing retirement funds due to a bad down in the stock market. Therefore, long- and short-term investments are encouraged.

With the roller coaster of the financial markets, timing is everything when it comes to withdrawing from retirement savings & investments. Unfortunately, what may happen with the return of these investments is more negative than anything to the investor. Meaning, more of the account or assets may need to be liquidated to ensure spending power and keep that consistent stream of income. This is called sequence of return risk. An example of this was with the 2008 Recession; where the market declined and many lost their homes, their other investments, their retirements. For those who have awhile to save and plan are able to likely recover loss. Retirees with less time or who need their income soon will have to sell their investment assets while the market is down to reduce further loss and keep that income. A great loss is encountered if assets cannot be recovered.

Diversification of these assets/investments is important. Individual assets, such as the mutual funds and ETFS, may be managed professionally. These funds may have a focus on small to larger companies, even with specific fields or industries in mind. For individually chosen stocks and annuities, consider stock investments. Within these various options, there are performance and choice risks. Investment for retirement funds is a choice that should be taken with research and guidance.

As mentioned, there is always risk with investing—especially for your dream retirement. The following are some great strategies to limit the risks.

Diversify. Hold various investments across the classes (i.e. hold bonds and stocks). The more spread out and full the investments are better at loss absorption your portfolio is. For example, loss in individual stocks can be offset by holding stocks in 15+ companies and balancing the funds throughout these. If you were to hold the same amount over 5 companies/stocks, you are exposed to a greater risk if one of those companies crashes versus if you have the funds spread over 15 or more. Even considering fixed income investments is great! These will not yield as much return, however.

Long term is best. With investments, time is typically on your side. Especially in the case of recovering losses. It is rare you will see recovery happen overnight—it takes years. Those near or in retirement will want to monitor their investments closely because if a major loss occurs, you may be better off selling. Top experts suggest relying on income-generating policies while moving funds from the stock market throughout your retirement years.

Roll with the pooled. Like carpooling to an event, a pooled investment is smaller contributions from individual to make a larger investment fund. Some examples are mutual funds and target-date funds. Oftentimes these are done with financial experts and there may be fees involved.

Remember fees. Higher fees do not necessarily mean a higher yield on investments. They reduce the overall return, so monitoring and understanding them is important for your financial wellbeing. 401(k)s and other defined contribution plans may have fees; sometimes a fee may be charged if using a financial advisor for advice and portfolio management.