“Sequence of returns risk is likely to impact your retirement savings for as long as you live. There are, however, several useful techniques you can employ that might minimize the impact and preserve your money.”- Joe Uppleger,
As you close in on retirement age, it’s likely your advisor will mention different threats to your savings. One of these, the “sequences of return” risk, is something you’ll probably need to address for as long as you live. Fortunately, a little advanced planning and the use of safe money products such as annuities can do much to blunt the impact of sequences of return risk and create a better retirement.
What should you know about the sequence of returns risk?
As you enter the “spend-down” portion of your retirement timeline, the order in which you access returns on your investments is critical. Losing money and withdrawing too much at the beginning of your retirement can severely affect your portfolio. The sequence of returns risk is when you risk losing money early in your retirement. Such losses make your later years much more challenging. If you withdraw from your portfolio too soon after a market downturn, you may run out of money much more quickly than you anticipated. That’s because any future gains you have are coming from a smaller base of assets.
How can you offset the sequence of returns risk?
Unfortunately, you can never eliminate the sequence of returns risk 100%. That’s because market volatility is as inevitable as gravity and as unpredictable as a tornado. No one truly understands the timing of the market. Nor can anyone accurately predict a downturn. What you can say with certainty, though, is that the money in your investment accounts must last as long as you do. So you’ll need both growth and protection when the paychecks stop, and you no longer make contributions to your accounts. An offsetting sequence of returns risk is vital to keeping your portfolio balanced. One way to accomplish an offset is through fixed-indexed annuities, life insurance, and other “safe money” products. Many seniors have become more aware of the sequence of returns risk and are beginning to implement strategies to help cushion the impact.
Retirees can use products that create guaranteed streams of lifetime income. Income annuities are products that protect one’s principal, provide guaranteed income for life, and can be customized to meet other needs, such as long-term care and legacy creation. Many economists tout annuities for their ability to create predictable streams of lifetime income, minimize waste in retirement and minimize the impact of sequence of returns risk.
You might develop a “buffer” plan. A buffer strategy often uses certain types of “permanent” life insurance. The idea here is that your portfolio will contain safer assets with a minimum of two or three years of income that kick in when the rest of the portfolio goes down in value.
You might adopt a “flexible” lifestyle option. Lowering one’s lifestyle when markets go down is perhaps the least effective option to safeguard against the sequence of returns risk. Spending less money might not be possible, though, because of unforeseen circumstances. Also, cutting one’s expenses to the bone is, for most of us, the polar opposite of a successful retirement.
Summing it up:
The sequence of returns risk is an unavoidable erosive force on seniors’ retirement portfolios. Unfortunately, even the best-planned individuals cannot eliminate this risk from their retirement blueprints. However, there are specific strategies that you and your financial expert can employ that will help minimize the impact that sequence of returns risk will have on your retirement. For example, safe money products such as fixed indexed annuities provide tax-deferred growth potential along with guaranteed lifetime income and protection against stock market volatility.
It’s a great idea to regularly review your plan to ensure you have the right mix of growth and protection to safeguard your cash against the sequence of return risk and other erosive forces.