The Dark Side of Investing: The Trap Your Retirement Payments Never Saw Coming!
The Dark Side of Investing: The Trap Your Retirement Payments Never Saw Coming!
Uncovering the Terrifying Reality of Sequence of Returns Risk
Did You Know? Order Matters!
In the world of investing, people are often told to create a mix of different investments based on how much risk they’re comfortable with. This mix is usually meant to be kept steady through ups and downs in the market until something in their life changes. While it’s important to try to make a good amount of money, especially when you’re getting ready to retire, there’s another factor that’s just as important: the order in which you make or lose money.
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Let’s break it down. When you regularly take money out of your investments, it can directly reduce how much those investments are worth. And this worth, in dollars, is the base on which your future returns grow. Here’s the catch — if you experience bad returns early on, it can eat away at your savings much faster than if your investments did well right from the start. So, as you step into retirement, being aware of when you take money out and how the market is performing can make a big difference in how long your savings will last. Understanding how these critical pieces fit together can help you make smarter decisions with your money.
Let’s dive into a comparison between two retiree scenarios. In both cases, they kick off retirement with $1 million and plan to withdraw $50,000 annually. The only twist is how their investment returns unfold. Sally sees positive returns at the start, while Tara faces negative returns early on. This switch in the order of returns can significantly impact how long their money will last during retirement. Simply put, knowing this difference helps retirees make wise decisions about their money as they navigate their retirement journey.
Same Average Return, Different Outcomes
Despite having the same annual average growth rate in both scenarios, and the final amounts being equal without withdrawals, the significance of the sequence in which returns are earned becomes evident when withdrawals are involved. In this case, Tara runs out of money by the time she reaches 83, whereas Sally, with a different sequence of returns, still has a substantial $2.5 million at the age of 90. This highlights a noteworthy contrast in their retirement dollars, emphasizing how the timing of returns can distinctly shape the financial outcomes during retirement.
Risk-Adjusted Returns Matter
As an investor, minimizing your sequence of returns risk involves taking strategic steps to counter the potential impacts of market volatility. One effective approach is to focus on diversification across various asset classes that do not closely correlate with each other. This can help in lowering the overall portfolio volatility, a crucial consideration as you approach the decumulation phase. By spreading your investments across different types of assets, you aim to generate income while reducing the risk of depleting your assets during a market downturn.
In The End
While the extreme numbers used in the example may not exactly mirror market conditions, they serve to illustrate a vital concept: the sequence in which returns occur during the withdrawal phase can significantly influence your overall retirement outlook. The prudent approach is to actively manage this risk by adopting strategies that prioritize stability and income generation. Being mindful of the potential impact of the sequence of returns can empower you to make informed decisions that contribute to a more secure and resilient retirement plan.
Did you know that navigating the uncertainties of the markets and your finances is generally smoother with the support of an investment advisor or portfolio manager? Studies consistently reveal that individuals who work with investment advisors and portfolio managers tend to have up to three times higher net worth on average, but that’s not all, there’s a significant impact on overall well-being, with those who seek professional advice exhibiting higher levels of happiness and lower anxiety. Having a guiding hand through the financial landscape proves beneficial not only in terms of monetary outcomes but also in fostering a sense of security and contentment, making the challenges of an uncertain year more manageable with professional assistance.
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However, unraveling the mystery of locating a trustworthy fiduciary advisor proves to be a perplexing task for many. A quick look at common Google searches related to the topic unveils a sense of urgency and a quest for guidance. Phrases like “Fiduciary financial advisors near me,” “Best fiduciary financial advisor,” and “Financial investment advisors near me” are entered into search engines hundreds of times daily, showcasing the widespread need for assistance in finding reliable fiduciary guidance.
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Joe A. Macek, FMA, CIM, DMS, FCSI
Investment Advisor, Portfolio Manager
iA Private Wealth
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Email: macekadmin@iaprivatewealth.ca
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This information has been prepared by Joe Macek who is an Investment Advisor Portfolio Manager for iA Private Wealth Inc. and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Investment Advisor Portfolio Manager can open accounts only in the provinces in which they are registered. iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.
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