In the context of retirement planning, market risk is a magnifier- it exacerbates all other risks. The effects of market losses on your well being and portfolio health are exponentially greater when your are in retirement and relying on your portfolio for support.
So, market risk, systematic withdrawal rate risk, demographic risk, and sequence of returns risk, are all tightly correlated, mutually enhancing, and dangerous….. and all can be mitigated by guarantees.
About Markets In Retirement
It’s critical to realize that in retirement, the rate of return is far less important than the timing of returns.
A cliché is, ‘I’m more concerned with a return OF my money than a return ON my money.’
When saving and investing, market ups and downs are to be expected, but when you are systematically withdrawing your assets, a bad year + forced withdrawals to buy groceries can equal a VERY bad year for your portfolio.
And we have experienced some VERY bad years just recently.
Portfolio risk is concentrated in the years just before retirement, and the first few years of retirement, when a 10% drop in your portfolio can rob you of many years of assets, given compounding growth and continued withdrawals.
Market Risks In Retirement
Market risks and portfolio volatility in retirement is a portfolio killer.
Market Risk Solutions
- Reduce Market Exposure By Guaranteeing Income To Cover Essential Spending
- Once Income Is Guaranteed, A Portfolio Has More Overall Safety
- Overall Risk Is Mitigated When Income Is Secure
When you’re approaching retirement, mainstream media and Wall Street would have you gradually start allocating more of your assets to ‘conservative’ and less to ‘growth’ as you near the peak.
But look at the highest risk point– it’s the peak of the triangle- the years leading up to retirement and the first years of retirement.
See, you always hear strategies like ‘The Rule Of 100’ whereby 100 minus your age is the amount you should allocate to “Growth”…. but I think this is backwards- in this “Red Zone” bubble, the 5 or 10 years or so before retirement and the first 5 or 10 of retirement are your highest risk years, and THAT’s when you should have the most conservative allocation!
You can not afford to lose in these years… there is no time to recover.
Market Risk Summary
- Past performance is no guarantee of future results
- The markets are choppier and more volatile than ever
- Many investment managers are steeped in bull market offense, and may not have any bear market defense strategies.
- If you’re approaching retirement, you do not have time to recover if you sustain losses
Market Risk Conclusion:
If you are carrying longevity risk AND market risk, you are doubly exposed…. Add in demographic risk pressures, withdrawal rate risk, and sequence of returns risk, and the retirement investment landscape is a veritable minefield.
Ahem…. Guarantees (Annuities) Mitigate All These Risks!
Few in the mainstream media know what to do or which way the markets are going. Few know what to make of this market.
Volatility is the new normal, and volatility can be your worst enemy if you’re planning a long retirement and a systematic withdrawal. Why carry market risk at all if you don’t have to?