The Biggest Threat to Your Retirement that You've Never Heard of
It may sound hyperbolic, but the average investor is not aware of the many threats that can derail a successful retirement. Most people have heard of inflation or are worried about how impactful medical expenses can be to a retiree. Most people haven’t heard about the sequence of returns risk.
When looking at how long a person’s money is going to last them in retirement, it’s very common to use an average rate of return. The average annual rate of return for the S&P historically has been approximately 10%. Most retirees aren’t solely invested in stocks and will use a lower average annual rate of return. Therefore, if someone earns 6% a year on average, they may not ever run out of money. Unfortunately, this is not real life. Markets have good years and markets have bad years. The question is, which market will you retire in and how will that affect your retirement.
Let’s look at two different retirees: Bill and Bob. Let’s assume they both started with the same amount ($1,000,000), invested in the S&P 500, both withdrew the same amount per year ($40,000 increased for inflation). The Blue Line represents an average annual return of 6%. The main difference is the year they retired; Bill in the year 1997 and Bob in the year 2000.
Bill’s Retirement:
After looking at the chart, it looks Bill’s retirement went according to plan. He had some dips in his portfolio value, but he still has more money than he started with after 15 years.
Bob’s Retirement:
Bob’s retirement looks a little different than Bills. They both had the same starting amount and withdrew the same amount of money. The big difference is that Bob started out his retirement in a down market and Bill started out in an up market. At what point do you think Bill gets nervous about his retirement?
The lesson here is that you may think you’re doing everything right when it comes to your retirement strategy, but there are some things you don’t have control over. Retiring into or just before a down market is one of them. Fortunately, there are some things you can do to mitigate this risk. Schedule a meeting to learn more.