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Is Your Retirement Ready For Sequence Of Returns Risk?


Not everyone has heard about one of the three major dangers to your retirement accounts. Most have heard of inflation and taxes. But few have heard of how sequence of returns risk can scramble your nest egg and leave you eating Ramen in your golden years. Most of the time we focus on the accumulation phase when discussing retirement accounts but equally as important is the distribution phase of retirement. Sequence of returns risk deals with the order of returns in the market while taking income from your market investments. You can have two different people with the same amount invested and withdrawing the same amount each year and depending on returns in the early years of distributions you can have a very different experience in how long it takes to exhaust their retirement accounts. For instance taking income from your retirement accounts mixed with some poor returns or losses in the market in the early years can hit you really hard and deplete your retirement accounts quickly. This is of course something you cannot predict at least precisely. Thankfully there are ways to prepare for this by having a liquid asset to pull from in the year following a down year in the market. If you take income from that liquid asset such as high cash value life insurance rather than from your retirement accounts in the market you can greatly increase how long your nest egg will last. Author David Mcknight refers to this as the volatility buffer in his book "The Volatility Shield" The Monte Carlo Simulation or 4% rule as it is often called was the answer to this issue but as time went on it to would need to be reduced from 4% to 3% according to most experts and that meant you needed to have a lot more accumulated to live off those numbers. Understanding the often used "average rate of return" and its downfalls along with having a liquid cash resource to pull from can dramatically effect how long the money you worked so hard to earn over a lifetime will last you in your retirement years. Of course there are many ways to setup up multiple streams of cash flow from other types of assets to avoid relying and overusing just one. A realistic view of this is much better than to put a bunch of money in your 401k and close your eyes and hope you can retire one day. Having a strategy to do this with a foundation of assets that are built on guarantees rather than speculation is a big part of it.

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