Do you know one of those people who seem to hit every green light on the boulevard of life? Everything they touch seems to work out exceedingly well? If so, they’re the person who’s likely to have retired in a year like 1991. Why? For one, the stock market began its almost-unbelievable rise through the 1990s, replenishing their retirement nest egg much faster than they could spend the money.
One of the most interesting, and potentially devastating, factors in retirement planning is the effect of something called ‘sequence of returns risk.’ In a CNN Money article titled: “Plan For the Critical First Decade of Retirement” authors Donna Rosato and Penelope Wang wrote:
“The idea is called sequence risk: After you retire and start drawing on your savings, it’s not just the long-term average rate of return that matters. The order in which those returns arrive is crucial. Retire near the start of a bear market or even just a long period of mediocre returns, and the effect of withdrawing dollars from a shrinking or stagnant portfolio is that you won’t have as much to gain from a rebound.”
So your friend, who may have retired in 1991, did very, very well. On the other hand, retiring in 2000 would have been comparatively devastating. The same rate of income withdrawals would have depleted the same starting investment portfolio decades sooner.
What can you do to combat sequence of returns risk? Simply retire at the right time – that’s it! Seriously, this is the trouble with retirement planning. If you can tell me, in advance, how well the market will perform, and how long you’ll live, this would be a pretty easy job, retirement planning. But you can’t, so it’s not.
Given the tremendous market returns we’ve seen since the devastation of 2008, one should wonder: “Where are we now, in terms of the market?” In other words, is this a 1991 time to retire or a 2000 time? While neither you nor I know the answer to that question, we can plan accordingly so that either scenario is a successful one. Build your plan right and you’ll profit when the market grows in 1990s fashion, while protecting yourself when the market feels like carrying on with 2000s-era shenanigans.
Like any successful sports team, games are won consistently when both the offense and defense are performing well. So in retirement, play to win by ensuring you’re playing strong performers on both sides of the ball.
We don’t need to have the Midas touch like your friend to win in retirement. We simply need to decide to prepare for 2000 and 1991, bear markets and bulls, alike. The peace you experience when you’ve done that? That’s what a successful retirement feels like.