Hi. Vince Oldre, Certified Financial Planner. If you are in or near retirement, and you have money in the stock market, or money at risk, then you need to stick around and watch this video. This will help you to understand the sequence of returns and sequence of risk, and how that impacts your income in retirement.
Risk in Retirement
Now, what I have here are two different people. I have Jane and John, and they’re actually going to have the same amount of money. They’re going to have a million dollars. They’re going to have a 7% average gain, and they’re going to actually change the order of those returns and losses. Now, they’re both going to take out $50,000 every single year, and that $50,000 is going to increase with inflation by 3%.
What we’re going to do is we’re going to have Jane. She’s going to have positive returns at the beginning, and then some negative returns at the end. What we’re going to do with John is we’re going to have him have the same returns, but we’re going to start with negative returns at the beginning, and have positive returns toward the end. If we look at what happens, Jane is going to end up with $1.7 million at the end of 20 years, versus John is going to actually be out of money by year 19. So what happened?
Well, this risk is what separated him from his money. This risk is what caused him to have those significant drops, but then he’s still taking money out of the portfolio. These returns can never help him catch up to get back to break even. This is how much of a difference the accumulation phase, or the distribution phase, are so much more different than each other, so when you are in or near retirement, you have to change the way you allocate your investments so that you can reduce the risks so you do not end up like John.
If you have any other questions about how a sequence of returns or sequence of risk works, and you want me to try to take more of the financial jargon out of this video, please let us know and we’ll be more than happy to help you out. But what I want you to get out of this video is that you have to look at the distribution phase of your retirement much differently than you do with your accumulation phase. You must know that the sequence of these returns, it doesn’t matter the average return, at 7%, the sequence of those returns, meaning in which order they came, will significantly impact the outlook of your retirement when you’re taking income from your portfolio.
I appreciate you watching this video. If you have any questions, please reach out and we’ll do another video for you, but I appreciate you watching, and I look forward to speaking to you next time.
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