Centara Connection

Avoid Market Volatility Ruining Your Retirement

Joe Anderson, CFP®, Senior Relationship Manager

You’ve done everything you were supposed to do. You saved, you invested, you diversified, you planned and now it’s time to retire. You worked hard to build a nest egg that you hope will last the rest of your life and still provide a legacy. Unfortunately, the reality is that a nest egg can dwindle in much less time than expected if portfolio distribution is not handled correctly. Too many retirees discover the risks involved with taking distributions from a retirement portfolio late in the game and realize they could have done a better job of planning. This frightening revelation can be avoided by understanding how to manage the sequence of portfolio returns during the distribution phase to make investments last.

Many investors believe that if they account for inflation in retirement, they have covered their bases. Although inflation is an important factor in planning for retirement, it is imperative to consider other factors, such as sequence risk. Sequence risk is the risk of receiving lower returns early in the investment period, therefore reducing the compounding benefit, a major factor in growth.

How does this happen? The 30 year return record of the S&P 500 (1969-1999) shows the impact of sequence risk. Say a portfolio is worth $250,000 (60% S&P 500 stocks, 30% bonds, 10% cash) and you take yearly withdrawals of $20,000 with a 3% per year adjustment for inflation. During this time the S&P delivered an average rate of return of 11.73%. Because this rate is just an average, it does not show that most of the gains came in the latter part of the period. Under these conditions, the portfolio is depleted within 15 years. By reversing the sequence of returns so that the higher returns came at the beginning of the period, the portfolio lasts the entire 30 years with an ending value of $1,557,169.

These differences are possible because of market volatility and its affect on investments. The previous example shows how effective planning can be the difference between running out of money halfway through retirement and making your nest egg last for the next generation. This is why it is important to take precautions and adopt strategies that allow you to overcome obstacles like sequence risk.

The good news is that sequence risk can be minimized. However, unless you are an experienced financial professional specializing in retirement planning, you probably need help. Unfortunately, not all financial advisors understand the nuances of the wealth distribution phase, therefore, many do not take these risks into account or protect against them. To be sufficiently protected, a savvy investor must collaborate with professionals who understand the various risks involved with retirement planning. A retirement specialist such as a Certified Financial Planner™ Professional can design customized strategies to help investors meet retirement goals.

Although you are ready to retire, your work is not done. It is up to you to ask tough questions to make sure you are working with a specialist who understands the distribution phase. By finding a qualified professional, you can achieve peace of mind and enjoy your retirement years.

Centara Capital Management Group, Inc.
8880 Rio San Diego Drive, 4th Floor
San Diego, CA 92108
(619) 398-1700
www.centaracapital.com
info@centaracapital.com

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