Plan a Sequence of Return Risks to Keep Your Retirement Savings Going
There are many ways to calculate how much money you need to save to retire . However, when you retire, a lot can affect how long that money lasts, including the year of retirement.
As personal finance site One Cent At a Time explains, retirement can have a huge impact on how long your savings last. Even if you retire with the same amount of money and withdraw at the same rate as someone else, if you start in different years, one of you could end up with a lot more money in the end.
The reason for this is the so-called return risk sequence. Let’s say three portfolios average 10% annually. There will be ups and downs every year. If person A retires in a more favorable year and withdraws very little money, they will have more money in their account, which could grow in the next year. However, if person B retires in the worst year and starts withdrawing money, they will limit their ability to make market profits in subsequent years.
The first 10-15 years of your retirement are very susceptible to this risk, as it can significantly affect the amount of income you receive in your account. You can check the source link to find out more about this. The site concludes that the best way to combat this is to stick to a 4% withdrawal rate every year. As long as you stick with it, you should have a better-than-average chance of maintaining high returns throughout your retirement. However, the state of the economy when you retire will always be an unpredictable variable, so it’s best to keep that in mind.
What is the sequence of return risks and how to manage it | One cent at a time