It has been said that if a Financial Advisor had a crystal ball, it could be used to map a foolproof retirement plan for all clients. In absence of that crystal ball, we are relegated to using words like Monte Carlo analysis and citing the history of markets.
One thing that is apparent is that no one really knows for sure how the stock market will perform in the short term. It cost me a fair amount of tuition money in terms of a Finance degree to eventually come to this realization. So how do you know when to retire? What if you retire at the wrong time? I recently read an article that talks about what it may mean to a retiree to choose the wrong time.
Let’s suppose that you retired in March of 2000 or October of 2007. These two dates would signify the beginning of some of the largest stock market declines in modern history. Would your 401(k) have become a 201(k)? Could you have retired with confidence? Might you have to return to work? There is a term known as Sequence of Returns that illustrates what the financial impact may be if you are withdrawing money from your portfolio and you catch a down market. Some retirees may never recover.
So what can you do to mitigate some of the risks of retiring at the wrong time? Here are a few ideas:
- Make sure that your investments are allocated correctly for the risk you are currently willing to take. We find that the attendees of our retirement workshops often have more equity risk in their portfolios than they are comfortable with. In down markets, this can have very real consequences. We use a tool in our firm called Riskalyze that measures your portfolio risk.
- Consider transferring some of the risks of running out of money to an insurance company in the form of an annuity There are multitudes of annuities in the marketplace that are designed to hedge against running out of money, if structured properly.