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The Success of Your Retirement Plan May Hinge on This Timing Factor


As you plan your retirement, make sure to consider the state of the market. While you don’t want to retire into a bear market if possible, retiring at the top of a bull market can pose the same risks, too.

That’s the reminder from recent commentary offered by Morningstar’s Christine Benz. In a recent webcast on the website, Benz noted “starting conditions at the outset of our retirement can give us a little bit of a clue as to how the market might behave, at least over the first 10 years of our retirement.”

A financial advisor can help you plan for retirement in a variety of market environments. Find a fiduciary advisor today.

Sequence Risk Is Important for Retirees to Understand

In the report, Benz alludes to “sequence of returns risk” or sequence risk. While it’s not always discussed, it’s an essential issue for all retirees to understand.

Sequence risk is the chance that you will need to take withdrawals from your portfolio at a time when those assets have lost value. Doing so can depress your overall return and shorten the longevity of your portfolio.

Sequence risk can be particularly impactful for retirees because they often rely on portfolio withdrawals to support their spending needs. As a retiree, if you start selling assets at a loss, you’ll be forced to withdraw a larger portion of your portfolio in order to generate the amount of income you need. That will leave you with fewer assets in the long run, which can permanently reduce your overall savings.

Retiring in a Bull Market Can Sometimes Hurt You

Bear markets are especially challenging for retirees and if you can avoid starting your retirement during a downturn, do so. But as Benz notes, sequence risk can ironically mean that a bull market may not necessarily your friend, either.

One of the signs of a coming downturn is an overly-inflated market. If prices have hit their peak right before you retire, then you can be exposed to a bear market soon after. This, Benz notes, is why investors should be careful about retiring in a long bull run. If prices have hit sustained highs for several years, then there’s a risk that you are looking at the top of a market that’s prime for losses. 

While timing the market is all but impossible, being cognizant of the market cycles can help you plan more effectively.

Plan Out Your Lifetime Retirement Withdrawal Rates

A retiree takes a break during a hike in the mountains.

The problem is, how do you plan around this? After all, there’s no reliable way to predict exactly when a bull or bear market will swing. What’s more, this issue will remain throughout your retired life. Retirements are long and markets are volatile. You will likely have to navigate many different bull and bear markets over the years.

Benz suggests the best thing to do is to have a plan. Importantly, think in terms of your withdrawal rate, she says. What percent of your portfolio do you want to draw down to hit your income goals? Do you want to pull out 4% of your assets each year, maybe more?

Benz recommends holding assets with strong cash and bond yields, since these are solid, safe forms of income that let you collect money without having to sell assets. Building a portfolio with the ability to switch between stock returns and bond/cash yields is a great way to hedge against sequence risk. It can allow you to base your withdrawals on the segment of the market that’s stronger at any given time. 

Bottom Line

The state of the market can make a big difference on your portfolio when you retire. If you retire at the top of a bull market, there’s a chance your investments will lose value almost as soon as you start tapping them. This is an issue called sequence risk, and it’s important to manage. Christine Benz of Morningstar recommends holding enough assets that produce adequate cash and bond yields so you can avoid selling stocks at inopportune times.

Retirement Planning Tips

  • A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • A successful plan for retirement will generate enough income to comfortably support your lifestyle. T. Rowe Price recommends retirees should initially look to replace 75% of their pre-retirement income. You can adjust your income replacement rate based on your income level, marital status and projected spending.

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