ILMA Compoundings September 2016 - 32

FINANCIAL FREEDOM

Be Prepared to Retire in a
Volatile Market
Murray Carter, CFP®, AWMA®

I

n an ideal world, your retirement would be timed perfectly.
You would be ready to leave the workforce, your debt would
be paid off and your nest egg would be large enough to
provide a comfortable retirement - with some left over to
leave a legacy for your heirs.
Unfortunately, this is not a perfect world, and events can take
you by surprise. In a survey conducted by the Employee Benefit
Research Institute, only 44 percent of current retirees said
they retired when they had planned; 46 percent retired earlier,
many for reasons beyond their control.1 But even if you retire
on schedule and have other pieces of the retirement puzzle in
place, you cannot predict the stock market. What if you retire
during a market downturn?

Sequencing Risk
The risk of experiencing poor investment performance at the
wrong time is called "sequencing risk" or "sequence of returns
risk." All investments are subject to market fluctuation, risk and
loss of principal - and you can expect the market to rise and
fall throughout your retirement. However, market losses on the
front end of your retirement could have an outsized effect on
the income you might receive from your portfolio.
If the market drops sharply before your planned retirement
date, you might have to decide
between retiring with a smaller
portfolio or working longer to
rebuild your assets. If a big drop comes
early in retirement, you may have to sell
investments during the downswing,
depleting assets more

quickly than if you had waited, and reducing your portfolio's
potential to benefit when the market turns upward.

Dividing Your Portfolio
One strategy that may help address sequencing risk is to
allocate your portfolio into three different buckets that reflect
the needs, risk level and growth potential of three retirement
phases.
Short-term (first 2 to 3 years): Assets such as cash and cash
alternatives that you could draw on regardless of market
conditions.
Mid-term (3 to 10 years in the future): Mostly fixed-income
securities that may have moderate growth potential with low or
moderate volatility. You might also have some equities in this
bucket.
Long-term (more than 10 years in the future): Primarily
growth-oriented investments such as stocks that might be more
volatile but have higher growth potential over the long term.
Throughout your retirement, you can periodically move assets
from the long-term bucket to the other two buckets so you
continue to have short-term and mid-term funds available.
This enables you to take a more strategic approach
in choosing appropriate times to buy or sell assets.
Although you will always need assets in the short-term
bucket, you can monitor performance in your mid-term
and long-term buckets and shift assets based on changing
circumstances and longer-term market cycles.
If this strategy appeals to you, consider restructuring your
portfolio before you retire so you can choose appropriate
times to adjust your investments.

Determining Withdrawals
The three-part allocation strategy might help mitigate the
effects of a down market by spreading risk over a longer period
of time, but it does not help determine how much to withdraw
from your savings each year. The amount you withdraw will
directly affect how long your savings might last under any
market conditions, but this is especially critical in volatile
markets.

Vol. 66 No. 9 * 32 * September 2016 Compoundings
ILMA Compoundings September 2016

Table of Contents for the Digital Edition of ILMA Compoundings September 2016
