Flight #45: What is Sequence of Returns Risk and Why Should it Matter to You? Avoid Running out of Money In Retirement

Q&A: Most common client questions lately:

Election Lessons Learned:

"Vote with your ballot not yourlife savings."

~Dimensional founder David Booth

https://my.dimensional.com/elect-to-leave-your-portfolio-alone

Will the stock market do worse now that xxx party has won and the election is over?

What do the numbers show? Does the stock market do better or worse when "X" party is in office, power?  

Lessons learned – do not anticipate or try to outguess the markets. Maintain discipline. Lots of advisors said: After the mid-terms, the markets will "pop." After Biden was elected lots of folks said markets will tank.  

Some things are unknowable...in the short-term. Luckily, we do not have to know.  

"Did anyone predict that Joe Biden would be elected president and that the US stock market would have its strongest election-week results since 1932?"

 

What the heck is FTX and how did Sam Bankman-Friedlose $16 billion in one day?

https://www.visualcapitalist.com/ftx-leaked-balance-sheet-visualized/

Founder and CEO Sam Bankman-Fried –FTX.

What crypto companies went bankrupt?

FTX's move marks the third crypto company to seek bankruptcy protection this year, following Voyager Digital and Celsius Network. The filing also clouds the fate of BlockFi, a crypto lender that FTX helped bail out with $400 million earlier this year.  ~CBS News

Boring is beautiful!  

• TRUMPLOSE tokens –on the FTX balance sheet.  Created by FTX to enable a betting market on whether Donald Trump would win or lose the 2020 presidential election.

 https://awealthofcommonsense.com/2022/11/boring-is-beautiful-in-investing/

"Those old stodgy blue-chip stocks in the Dow that pay dividends and have stable cash flows are crushing the innovation-led stocks that have more potential than profits in 2022.

This is in stark contrast to the FOMO days of 2020 and 2021 when it felt like the only place to put your money was the most intoxicating of investments.

French philosopher Blaise Pascal once wrote, "All of humanity's problems stem from man's inability to sit quietly in a room alone."

The investor play on words here would be: "All portfolio problems stem from investor's inability to stick with a boring old asset allocation."

Successful investing should be boring. It should be long-term in nature. It requires patience and discipline and the ability to ignore the madness of the crowds.

But you can't brag about boring to your friends and co-workers. No one writes glowing profiles about normal people who diligently save and invest their hard-earned money, keep fees to a minimum and stay the course.

That's not sexy.

Sexy is SPACs, meme stocks, IPOs and life-changing amounts of money in a short period of time.

Why wait decades to build wealth when you witnessed someone else do it overnight?

"Flight #45 –Retirement Income:

The Narrative
Why is investing during retirement very different from investing in the accumulation phase of your life?

Example: A) You are an accumulator, and you invest $12,000 January 1, 2020.  You fall asleep and wake up on December 31, 2020.  B) You are in retirement taking monthly income.  You have $12,000 on January 1 and you are taking monthly income of $1,000 per month.

Accumulators are like chickens and eggs...you're involved in producing eggs. Retirees are like pigs, and they are producing bacon.  You are committed in retirement!

How to avoid running out of money in retirement:

1. Know your budget – Spending plan. 
   1. Spend Conservatively. 
   2. Spending flexibility. 
2. Social Security timing.
3. Keep investing! (In equities)
   1. Reduce volatility.
   2. Buffer Assets – Avoid selling at losses. 
4. Taxes:
   1. Minimize RMDs
   2. Roth Conversions when income declines –65-70.
5. Life expectancy – Longevity.  
   1. E.g., client age 85. 
6. Sequence of return risk
   1. https://www.schwab.com/learn/story/timing-matters-understanding-sequence-returns-risk
      1. Avoid withdrawing assets in a down market.
      2. Will I have to change my retirement goals or retirement income due to the down market?

Part 2 – How to mitigate the above risks...especially #6.  

1. Have a plan – Pick one or a combination of...
   1. Annuities?
      1. Annuities in general –Sales commissions! Fees...
      2. SPIA –Best, but no access to principle.
      3. Contingent Deferred Annuity –Constance from RetireOne
         1. Risk wrap: Same investments, income guarantee.
         2. Turn on –Turn off.
   2. Retirement Bucket approach?
   3. 4% Rule
   4. Target Date funds
   5. Dynamic spending, ongoing planning.
      1. Monte Carlo...MGP
      2. What's wrong with online calculators?
         1. One said I'll have $12,500 and the other said $19,500.
2. Why does seeking advice pay off?
   1. Annual withdrawal rates can change
   2. What about underspending in retirement?
      1. Don't get to age 90 with millions left over...unless that's your goal.
      2. Spend more in the early part of retirement...the retirement smile.
   3. Mitigating the risks
   4. What if...!
      • Higher Inflation
      • Part-time job
      • Reverse mortgage
      • Long Term Care Risks

 

From Retirement Researcher –Wade Pfau, Professor of Retirement Income at the American College.