Reducing the risk of outliving your assets
The markets may have recently hit a new all-time high, but if you retired in 2000, you may have already run out of money. Surprisingly, it’s a completely different story if you retired just a few years earlier or a few years later.
The timing of when someone retires can have a profound effect on the performance of their accounts. Sequence risk, also known as sequence-of-returns risk, pertains to the timing of returns on your investments after you’ve already started withdrawing from them.
A tale of three brothers
To illustrate the impact of sequence risk, here’s the story of three hypothetical brothers each born three years apart. They each retired at age 65 with a $1 million lump sum pension, which they invested according to Standard & Poor’s 500-stock index models. They immediately began taking withdrawals of $5,000 on the same dates of each month. But the results, you will see, are very different.
If you were able to know how the market will perform in your first few years of your retirement, then you would have a high probability of success!
Since we cannot know what the future holds, talk with your financial adviser about these techniques and others to reduce the chance of ending up like the middle brother — sleeping on one of his other brothers’ couches.
All contents © 2016 The Kiplinger Washington Editors, Inc. Distributed by Tribune Content Agency, LLC.
