One of the biggest threats to retirement

| September 14, 2016

There are many factors which can influence one’s retirement: healthcare costs, unexpected emergencies, periods of financial duress, or other situations. These variables can have a tremendous impact on a person’s future. It’s important to plan for any such occurrences ahead of time. In a previous blog post, we discussed tips on planning for retirement security.

There’s one factor which can greatly influence a long-term retirement strategy: having an “early” bear market. Or in other words, it’s when a major market correction – or a market downturn – leads to retirement account losses. 

How can an Early Market Downturn Affect Retirement?

The foundation of any retirement strategy is your “retirement number,” or how much you’ll need for financial security in retirement years. Say a person retires and then they’re hit with a major market downturn early on. 

Even if average annual returns over time are similar, a person who is hit with a windfall might struggle more with preserving their wealth. They could possibly have a more difficult time in retirement than someone who suffers from a market correction in later years. Even someone with higher annual returns can still suffer more if they have financial losses earlier in retirement.

This issue is called the “sequence-of-return risk” and shows how important timing is in retirement. If an investor takes losses, it takes time to recover – precious time in their retirement years. It’s a problem which is tied to people needing to withdraw retirement savings to cover living costs. 

How Do I Avoid This Risk?

A retirement plan should account for all factors, including worst-case scenarios. After all, it’s not ideal for you to have to liquidate your investment assets to cover your losses. Or worse: if initial returns are low for a long period, in the future you may not have enough money to reap the full benefits of a market rebound.

This step involves planning for a retirement number that will enable you to ride out the effects of any emergencies or market corrections. Then you can exert more flexibility in your financial needs to help you reach that goal.

Here are some questions to consider:

• What is your current retirement number?
• Does that account for events such as emergencies or financial windfalls from market corrections?
• What are your goals in retirement?
• How are you tapping sources of income for your retirement needs? 
• How will you be using personal savings for retirement? Your pension or other retirement vehicles? Your investment portfolio? 
• If you’re retired, how much of your investment portfolio is allocated in volatile markets (and therefore vulnerable to bigger losses)?
• If you’re planning for retirement, how much of your investment portfolio will be in volatile markets?
• If you’re retired and have experienced the effects of a market downturn, are there ways you can cut expenses to remain secure in lean-return years?
• How does Social Security fit into your retirement plan?
• At what age will you file for Social Security benefits?
• What will your medical costs be?
• Do you or your partner have any medical conditions which may prompt emergency needs in the future?
• Will you be supplying loved ones with any financial support? 
• How will assistance to loved ones affect your retirement number?

Aside from avoiding sequence-of-return risk, a retirement plan accounts for the basics: covering living expenses, long-term care costs (if applicable), and healthcare costs. Be sure to consult with a qualified financial professional to plan for your unique needs, goals, and objectives.