Category Archives: sequence of returns

Baby Boomers are Getting Richer

According to Bloomberg writer Ben Steverman, Baby Boomers – “part of the wealthiest generation in U.S. history” – just keep getting richer.   The Boomers started turning 65 in 2011 and since then the S&P 500 Index is up 91 percent.

That’s fortunate because the worst thing that can happen to a retiree is for his retirement investment portfolio to decline just as he retires and begins dipping into his savings.  If  the market declines as he retires, with no income to replenish his losses, the retiree find himself in a financial hole he may not be able to climb out of.

Older boomers have experienced what is arguably the best-case scenario: The S&P 500 has returned 269 percent since its March 2009 low. As a recent study in the Journal of Financial Planning shows, wealthy retirees can be very cautious about spending down their savings. This instinct, along with the stock market’s new record, suggests that many boomers are likely to end up with far more money than they know what to do with.

Researchers followed the spending and investing behavior of 65- to 70-year-olds from 2000 to 2008. The poorest 40 percent of the survey respondents generally spent more than they earned, according to the study, which was funded by Texas Tech University. Those in the middle were able to keep their spending at about 8 percent below what they could have safely spent from pensions, investments, and Social Security.

The wealthiest fifth, meanwhile, had a gap of as much as 53 percent between their spending and what they could have spent.

For individuals, broad statistical averages like these are not very useful.  As retirement looms, everyone should have a plan that will help them determine what happens if they get lucky and the market goes up, and what they can safely plan to spend if the market goes down.

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The “Bad Timing” risk to your retirement

One of the biggest things that create problems for people who retire is a market decline at the wrong time …. just as they retire.

The reason is easy to understand.

Retirement usually corresponds to the time people have gathered the most assets. Let’s assume that the retiree has managed to gather a million dollars. If this money is fully invested in the stock market and the market goes down 50%, he’s lost $500,000. Suddenly half the money he’s put aside has evaporated, just as he started on his retirement journey. If this happens the retiree may run out of money much earlier than planned.

This is referred to as “sequence of returns” risk. It applies to the time people begin to withdraw their money to fund their retirement dreams. One pension consultant believes that there is a 10 year period when this risk is greatest: five years before retirement and five years after. This is the time when portfolio balances are highest and the amounts of money that can be lost are greatest.

In contrast, a big loss at the beginning of the time we begin to save has much less impact. Simply put, if we put $2000 aside to begin our savings journey to retirement, a 50% loss is only $1000. That’s a lot less damaging than losing the same percentage of a million dollars. Plus we have much less time to make it back.

That’s why “sequence of returns” has very little impact when we’re accumulating assets, but a big impact when we’re taking money out.

Risk control is important at all stages of life, but especially as we’re near – on into – retirement.

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