For your education and entertainment this month, I wrote an over-long and painfully boring column on “sequence of returns” and how that can affect your investment portfolio in retirement. To acknowledge the dubious claims of “educational” and “entertainment”, I trashed the whole thing and started over.
Here’s the column re-write in normal language: If things are rosy in the economy and investment markets during the early years of your retirement, you will probably be much better off than if they are not. Furthermore, if they are not so rosy and it turns out that you are soon withdrawing an unsustainable amount from your investments, you may well run out of money. Duh. I think that is why it is called “unsustainable”.
It originally took me 555 words (no I didn’t count, Microsoft Word did) to say that. That doesn’t include my spreadsheet with 27 lines and four columns of numbers in case you wanted proof. As often as I try to remind you to not spend so much time on the details that the important information gets lost in the weeds, you’d think I might remember that myself.
So what, you may ask, was my point in even starting a column on such a dull topic? The idea was spawned from the questions from people who are looking for either reassurance after the daily deluge we all get predicting chaos, cataclysm and catastrophe are just around the corner. Furthermore the prognosticators of doom will assure you that the lack of destruction, despair and devastation (okay, I’ll quit with the alliteration for today, but it was fabulous, fantastic, fun for me) is irrefutable proof that the very same is just around the corner.
To steal from Mark Twain’s famous quote and rephrase it: “Rumors of the end of life as we know it are greatly exaggerated.” But on the other hand…
It is a scary world out there. And as I showed in my long & unseen diatribe on “the sequence of returns” there is plenty of stuff out of your control that affects your ability to make ends meet. This is obviously a lot more intimidating in those years when we are older and don’t have the employment options and number of years left to make adjustments.
(By the way, if you are morbidly curious about “the sequence of returns” issue, you can search for it on the Internet. You’ll find better written and even more boring articles on the subject than I generated.)
So what do you do when stuff like the “banking crisis” of 2007 comes along during your retirement and reduces your portfolio by 20, 30 or even 40 percent in one year? Answer: You planned for this possibility. I don’t expect you to be either happy or nonplussed by bad times, but I do expect you and your advisor to have an idea how to manage it.
So if you’re spending more time today talking about rates of return, fee structures and the ilk than you are on risk management and retirement spending forecasts you need to adjust your thinking a bit. Perhaps a visit with your financial advisor about the road ahead, not the road behind can allay those fears.