What IS “sequence of returns risk”?
Sequence risk, or sequence of returns risk, is the risk that the stock market crashes early in your retirement. Long-term average returns matter less than when those returns occur. If your portfolio drops dramatically in value early in retirement you end up selling low without the ability to gain by buying low. You also have to sell more of your stocks to generate the same amount of income, which means you’re selling off your nest egg shares at a faster rate. It’s very difficult to recover from a major investment crash early in retirement. As persons who retired in 2008.
Sequence-of-returns risk can have a severe impact on an otherwise sound portfolio, writes Phil Caminiti of New York Life Insurance. He suggests retirement savers look into using income annuities as they can provide guaranteed lifetime income regardless of market fluctuations and reduce the amount retirees may need to withdraw early on to cover expenses.
“Income annuities are a useful hedge against sequence-of-returns risk for two reasons: 1) They provide a guaranteed source of lifetime income that is not correlated to market ups and downs or interest rate fluctuations, and 2) annuity income lowers the withdrawals that retirees might need to cover expenses. This is particularly good news when the market performs poorly in the early years of retirement by helping retirees avoid selling at the bottom.”
Another major advantage of an income annuity is that scammers can’t get access to your nest egg. There have been too many examples of super-sophisticated scams targeting older persons resulting in them losing their entire nest egg. The Wall Street Journal recently reported on scammers who very convincingly impersonate IRS and FBI officials threatening the targeted person with jail and high fines if they don’t cooperate and transfer their investments to accounts where the FBI can supposedly protect their money. These super sophisticated scams have exploded in the past year.
Don’t get sucked in to one of these scams and don’t let your parents or grandparents become victims.
Source: Financial Planning for Women