True or False: In retirement you invest the same way you did before retirement, but with less risk.
(Don't you love my pop quizzes?)
The answer is 100% FALSE!
Last week we verified with simple math that the timing of returns doesn’t matter if you're not withdrawing funds.
If you're withdrawing funds (like in retirement), then you absolutely have to worry about the sequence of returns. In fact, it's such a big risk it has a name - Sequence of Returns Risk. (Not a very creative name, is it?)
Let's take a look at our hypothetical portfolios again. This time we'll add a zero to make it a real life example. And let's assume you are also withdrawing $50,000 each year to live off of.
Getting the negative return first means you're $25,000 poorer by Year 2. Uh oh!
And that's just one year of bad returns. Imagine if you retired in 2000 and you experienced 3 YEARS worth of negative returns immediately after retiring.
If you were still investing your money like you did before you retired, you probably had to go back to work and are STILL working. (I know unforunate souls who went through this, but only came to me for help after it was too late.)
So what's a retiree to do? More on that next week! (Yeah cliffhangers!)