Seniors are already worried about outliving their retirement resources and based on the new mortality tables, their worries are warranted. They’re also concerned their monthly withdrawal rate may be too high to sustain them through their lifetime, so they reduce their withdrawal rate to match their portfolio’s income from dividend and interest in an effort preserve their holdings. They scale back their domestic spending to save for future bills. All their efforts may be for naught, because of the sequence of returns.
When you’re climbing a mountain, the goal is to get to the top safely. You’re not going to live there; you’re just accomplishing a goal. Back at base camp, you’ll pack the supplies you need to ascend and descend from the mountaintop. The strategy used to ascend to the mountaintop is different than the descent.
Interestingly enough, more deaths and accidents occur on the descent from the mountain then the climb up. During the accumulation period of retirement, you target a specific age when you’ll retire. You’re climbing the mountain. Over the years, as you contribute to your retirement, the market returns will vary. The outcome will be the same if you randomize the same returns over the same period of time in different chronologies, i.e., the sequence of returns doesn’t matter. But the math doesn’t work the same way during distributions. That’s where the sequence of returns really matters and its consequences can be quite devastating to a retirement portfolio. Watch the video interview with popular platform speaker, author, retirement software developer and adjunct professor at the American College, Curtis Cloke, addressing the devastation the sequence of returns can cause during in retirement.
Systematic withdrawal plans that don’t take into account the sequence of returns may suffer irreparable damage and leave a portfolio inadequately funded for the future. It doesn’t take a lot of time in a downward trending market to erase gains built up over years to cut into your original contributions. It could actually cause a shortfall before a retiree’s projected life expectancy.
The sequence of returns can only be mitigated with guaranteed lifetime annuities with an annual cost-of-living adjustment and net of fees. There may be a few money mangers so tactical in their approach they may be able to match the net returns of a guaranteed lifetime annuity, but not without risk.
Like all financial product lines, there are good and bad annuities in this area of guaranteed lifetime income. Most retirees have a monthly budget of domestic expenses that cannot be reduced, so guaranteed lifetime income with an annual cost of living adjustment can meet these necessities and remove the worry of outliving their money. If any one item of retirement income planning proves it’s not a do-it-yourself project, it’s the sequence of returns.
Syndicated financial columnist Steve Savant interviews popular platform speaker, best selling author and adjunct professor Curtis Cloke. Curtis is also a leading retirement software developer and has been ranked as one of the top advisers in the country.