Two Risks in Retirement Planning that are Frequently Ignored

Retirees experience heightened vulnerability to “sequence-of-returns risk” once they are spending from their investment portfolio.  Poor returns early in retirement can force the sustainable withdrawal rate well below what is implied by long-term average market returns.  The returns experienced near your retirement date matter a lot more than most people realize.  Retiring at the start of a bear market is incredibly dangerous.  You might enjoy positive average market returns over 30 years of investing, but if negative returns are experienced in the early stages when you start spending from your portfolio, wealth can deplete rapidly through withdrawals, leaving a much smaller nest egg to benefit from any market recovery, even with the same average returns over a long period of time.

Retirees face the risk that inflation will erode the purchasing power of their savings as they progress through retirement.  While it may not be noticeable in the short term, even low inflation can have a big impact over a lengthy retirement.  With just three percent average annual inflation, the purchasing power of a dollar will fall by more than half after 25 years.  This is why it is so important that a portfolio be adjusted to account for inflation from year to year.

These risks are not unforeseen within a modern, comprehensive retirement plan-but they are often giving insufficient priority in the plan analysis and conclusions, and lack a prominent place in the ongoing monitoring process.  Both of these risks highlight the difference between regular long term investment planning, and the compressed time frame of the actual retirement during which you are drawing on your savings.

Posted in Perspectives, Planning Opportunities, WillPlan Blog.