It is time for the next installment in our series of retirement mistakes, called “The 7 Deadly Sins of Retirement Planning.” #5 is Not Being Risk Smart
The 7 Deadly Sins Are:
- No Holistic Plan
- No Spend Down Strategy or Exit Plan
- Too Focused On “Growth” Rather Than “Income”
- No Volatility Buffer / Non-Correlated Asset Classes
- Not Risk Smart
- Mistakes with Insurance
- No Strategy for Taxes
Too many people try to retire with no SWAN money.
Swan? Like the bird?
No, I mean SWAN.
“Sleep Well at Night.”
I saw this phrase coined in the book “Retirement Reality Check: How to Spend Your Money and Still Leave an Amazing Legacy,” authored by Josh Jalinski.
In the last blog post, I advised on the importance of creating & funding a Volatility Buffer that was not correlated to the equities market.
When most people hear about the Monte Carlo simulations, they think it is crazy that they can only withdraw only 4% from their investment portfolio.
When they hear that in 2013, that number was lowered to 3%, they are even more incredulous.1
How is that possible?! If the average return of the stock market is 8% or 10%.
How in the world can you only withdraw 3% in retirement? The answer is that because on the day you retire and begin taking distributions from the portfolio, all the rules of the game change.
Retirement is a complete paradigm shift.2
For all of your life, you have been a saver and an investor.
You have grown used to 
checking the average returns on your stocks, bonds, 401k, IRA, brokerage account, etc.
A 5% rate of return is better than 3%, and a 7% rate of return is better than 5% of course.
However, on the day you retire, that all changes.
Why? Because once you begin taking money out of a portfolio instead of investing into the portfolio, average returns no longer matter.
What matters much more is the SEQUENCE OF RETURNS.
If somebody suffers a series of downturns early on in retirement, while they are drawing money out? Forget about it!
Why is this so damaging to your retirement future? Because as the market forces are driving the value of your account down by 30%, 40%, 50%, you are exacerbating & compounding the problem by taking money out, which just accelerates the downward spiral.
It is a double whammy!
Every time you receive income from a managed money portfolio, you are selling shares for income. If the value of those shares are depressed at the time of sale, you effectively lock in your losses.
The result? You deplete the account so quickly that there is not enough money left in the account to fully take advantage of the good volatility/compounding when the market recovers and enters a positive phase or bull market.
During the retirement distribution phase, you could actually achieve a lower average rate of return and end up with MORE money.
How is that possible? Because of the “Sequence of Returns.”
Negative years early on in retirement can decimate your portfolio.
You can quickly run the risk of withdrawing too much money, especially with a longer life expectancy of living to age 85 or 90.
Can you imagine running out of money at age 76, and then being forced to live on just social security for the next 10-15 years?
The really challenging part? There is nobody out there who can control or predict the stock market.
Just ask anybody who retired in the midst of the dotcom crash.
Or in 2007, just before the financial crisis.
The only way to be “risk smart” during the distribution phase of your life is to work with an adviser who can help you strategize for success, whether the market goes up OR down.
The accumulation of money and 
chasing rates of return during your working years is only a small piece of the puzzle.
Managing and navigating the retirement plan is a much more complex situation.
Here are some of the risks that need to be neutralized, with the first 3 being correlated to investment risk:
- Sequence of Returns Risk
- Market Risk
- Withdrawal Rate Risk
- Longevity Risk
- Deflation Risk
- Inflation Risk
- Long Term Care Risk
- Mortality Risk (death)
- Legislative Risk
- Taxation Risk
Throughout this blog series, I have spoken about many of these risks, and different ways that they can be handled and planned for.
What is really important is enlisting professional help, someone specifically trained in the retirement arena, to create a holistic plan to assess the entire scope of your individual situation.
A retirement specialist can make sure that the plan engulfs your goals, hopes, and dreams along with your specific risk tolerance to create a holistic investment and retirement plan to optimize your long-term outcome.
Contact me for a complimentary appointment. I would love to help you put all of this together. And do not forget to check out blog post #6 in the series, mistakes with insurance. Blog #6 will address a few of the other major retirement risks listed above. You will not want to miss it!
P.S. If you haven’t checked it out yet, please stop by my mini online seminar How Retirees and Pre-Retirees Can Potentially Avoid Going Broke While Keeping Their Nest-Egg Secure! Tons of great information and bonus is it is 100% COMPLIMENTARY!
1 https://www.palisade.com/risk/monte_carlo_simulation.asp
2 https://www.kuhlmannfinancial.com/insights/blog/the-coming-paradigm-shift-in-retirement-planning/
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