SEQUENCE-OF-RETURN risk

 "SEQUENCE-OF-RETURN risk has long been a major concern among retirees—and it’s a real danger right now for those who just quit the workforce or soon will. Also known simply as sequence risk, it refers to the chance that the market declines sharply, forcing retirees to sell investments at depressed prices to generate income." 

Sound like today's situation with investment losses and high inflation? Keep reading...

"Wade Pfau, a leading retirement researcher, published a paper highlighting the danger involved. As he makes clear, a few years of market losses coupled with portfolio withdrawals can decimate savings, increasing the risk that a retiree will run out of money."

Richard Conner explains how to counteract sequence-of-return risk in his Humble Dollar https://humbledollar.com/ blog post "Beginning Badly." Learn five ways to structure retirement income to lessen sequence risk’s impact:  

1. Annuitize. (Search for the links to annuities in this blog)

2. Cash bucket.

3. Reduce spending.

4. Work.

5. Social Security. (But I caution against taking SS before age 70 unless you expect to die young.)

Get the details at: https://humbledollar.com/2022/09/beginning-badly/?utm_source=mailpoet&utm_medium=email&utm_campaign=another-ses-test_7  

 

 

How much to invest to have $1 million by retirement

Start early to attain your goal.

Starting at age 20:

• Assuming a 6% return, compounded monthly, you should aim to invest $364 a month toward retirement to reach $1 million in savings by age 65.

Starting at age 30:

• Assuming a 6% return, compounded monthly, you should aim to invest $704 a month toward retirement to reach $1 million in savings by age 65.

Starting at age 40:

• Assuming a 6% return, compounded monthly, you should aim to invest $1,444 a month toward retirement to reach $1 million in savings by age 65.

Starting at age 50:

• Assuming a 6% return, compounded monthly, you should aim to invest $3,439 a month toward retirement to reach $1 million in savings by age 65.
  

  How to retire a millionaire By Jazmin Goodwin, CNN Business

Invest wisely. Check out other blog posts on index investing and investing.

Are you really ready to retire? Mapping Out a Fulfilling Retirement

Thanks Kim Blanton, author of The Squared Away Blog for these posts. Check out https://squaredawayblog.bc.edu

"A big part of retiring is letting go of what can be a strong identification with work, and people are reluctant to give that up." Here is some help...

Boomers typically must go through four tasks as they transition to a satisfying retirement:

Decide to retire. Mapping Out a Fulfilling Retirement: https://squaredawayblog.bc.edu/squared-away/mapping-out-a-fulfilling-retirement/

Detach from work. Retirement is Liberating – and Hard Work: https://squaredawayblog.bc.edu/squared-away/retirement-is-liberating-and-hard-work/

Explore a new life structure.
the adjustment to retirement can be a difficult period.  the typical baby boomer comes to retirement with no more than an idea or two about how they might spend their time.

Consolidate a new life structure. Putting together the pieces of a satisfying retirement life requires setting priorities and following through on them with determination. 

 

 

Stocks are Risky; Pre-retirees and Retirees Must Consider your Time Horizon

The large drops in the stock market over past few days related to the coronavirus epidemic should be a wake up call to investors. Let's review some basic principles of investing.
Remember that your time horizon for retirement investing is the rest of your life and you may live to be 95 or 100!
Selling stocks when the market drops locks in permanent losses.
Stocks often rise and fall dramatically in very brief spurts in reaction to global events. Stock markets do NOT rise and fall in nice steady steps. Dramatic drops and increases are the norm. NO ONE can predict when these dramatic ups and downs will occur!
Stocks are investments for the long run. No money that you will need in the next five years should be invested in stocks. Funds needed in the short run should be set aside in safe places like savings, CDs, money market funds, I-bonds, T-bills, and corporate bonds.
The Bucket Approach to investing takes into consideration the time-related needs of investors. Money needed in the next 1-3 years (depending on your risk tolerance) should be in safe places that will not lose nominal value. Funds expected to be needed in 3-5 years can be invested conservatively in dividend paying stocks, high quality bonds, and other conservative investments.
Funds for the long run (over 5 years) should be invested for growth in the stock market.

This strategy is specific to the retirement decision for pre-retirees (within 5 years) and persons in retirement.

SO:
Investors in the accumulation phase and more than 5 years from retirement should review their asset allocation and rebalance yearly.
Investors nearing retirement should institute a bucket approach for their investments, even if they also have a pension.
Investors in retirement: the recent market plunge should be a wake-up call to carefully review your retirement income plan. DON'T PANIC! If you sell your stocks today your are locking in permanent losses. We went through this with the global financial meltdown in 2008-09. Have investors learned from that experience?

Benefits of a bucket approach:
Predictability and peace of mind.
You can tap assets and still generate portfolio growth. 
Considerations: 
You need to be disciplined about generating a set return sufficient to meet your retirement needs. 

Read all 3 articles below for slightly different perspectives on time horizons for the 3 buckets. 

See: How to Use the Bucket Approach to Make Your Retirement Savings Last by pete Woodring

https://www.kiplinger.com/article/retirement/T037-C032-S014-bucket-approach-make-your-retirement-savings-last.html
"The bucket approach is an effective way to mitigate sequence and longevity risk. The general idea is to set up three or more distribution “buckets,” with different asset classes and different time horizons for liquidation. Note that the time horizon for the 3 buckets will differ depending on the author. This article takes a very conservative approach by allocating stocks to time horizons of 10 years of more. 

The Pros and Cons of a Bucket Savings Strategy by Rebecca Lake https://money.usnews.com/investing/investing-101/articles/2017-11-10/the-pros-and-cons-of-a-bucket-savings-strategy Retirement investors should have "now," "soon" and "later" buckets.  "The bucket strategy can insulate your retirement portfolio from sequence risk and longevity risk. The former refers to the risk of earning lower or negative returns early on when withdrawing retirement assets. The latter simply means outliving your savings."

What Is The "Bucket" Approach Strategy To Retirement Income Planning? by Jamie Hopkins https://www.forbes.com/sites/jamiehopkins/2019/04/25/what-is-the-bucket-approach-strategy-to-retirement-income-planning/#7b09608539d6

 

Retirement Income Security Evaluation Score (RISE Score™)

Retirement Income Security Evaluation (RISE) 
“evaluates just where you fall in terms of having steady income in retirement, much like a credit score, on a zero to 850 scale.”

“Consumers can access the tool online. After inputting factors such as the Social Security income you expect, any pension income you may have, how much you have saved and your monthly living and medical expenses, you can see how well you will fare financially in retirement.”

The tool is aimed at individuals ages 45 and up with investable assets of $75,000 to $2 million.

Check out the RISE score at: https://www.retireyourrisk.org/rise-score/

“The purpose of the Retirement Income Security Evaluation Score (RISE Score™) is to provide you with an estimated measure of income security to help you determine whether you're on track with your current retirement income plans. The RISE Score™ can help you assess how well your retirement portfolio will cover basic living expenses and health care costs in retirement. The RISE Score™ is also designed to help answer this simple question: How can my retirement security potentially be improved through the addition of lifetime income solutions in my retirement planning strategy?”

4 Mental Tricks to Help You Save More for Retirement

"How do you psych yourself up to save money for a goal that’s decades away, like retirement? With a little mental trickery."
"Amassing the high dollar amounts needed for your golden years takes a long-term commitment. Sticking to your resolve — both financially and emotionally — requires strategies for dealing with a steady stream of near-term spending temptations and other expenses (planned and otherwise).
Here are some ways to help you stay strong." from Dayana Yochim writing for NerdWallet. Details at: https://www.nerdwallet.com/blog/investing/4-mental-tricks-to-help-you-save-more-for-retirement/

1. Paint a detailed picture of the life you want to live

2. Give your willpower muscle a break

3. Calculate the cost of today’s spending decisions

4. Reward your selfless behavior

 

 

 

How to spend just the right amount in retirement

"Retirees tend to gravitate to opposing poles in how they spend their nest eggs, with some too parsimonious and others too carefree. The best course lies somewhere in between, as Steve Vernon explains" in Forbes.
The Spend Safely in Retirement Strategy 
is simple enough that you can implement it on your own.
1. optimize your social Security benefits.
2. Follow IRS Required Minimum Distribution (RMD) guidelines for withdrawals from retirement accounts.
3. Work (maybe just part-time) until age 70, enabling delay of Social Security claiming to ensure the highest benefits.
4. Consider tapping home equity (you ARE on track to pay off your mortgage before retiring, right?)
For a summary: 
https://www.forbes.com/sites/nextavenue/2018/01/16/the-best-way-to-spend-money-safely-in-retirement/#3ae0641b4fdd
For details: http://longevity.stanford.edu/blog/2017/11/29/optimizing-retirement-income-by-integrating-retirement-plans-iras-and-home-equity-a-framework-for-evaluating-retirement-income-decisions/ 
The main drawback here is that MANY retirees want to do extensive, expensive travel, buy an RV or new vehicles, and splurge during the first few years of retirement. When you are first free of work, have good health and time, and want to enjoy life, it is not uncommon to spend much more in the first years of retirement than you did when working. You can do this with proper planning but be sure you pay off all credit obligations and mortgage before you take the plunge. 

10 Retirement Mistakes Baby Boomers Are Making

To avoid these mistakes, check out:
http://www.forbes.com/sites/mattcarey/2016/08/16/10-retirement-mistakes-baby-boomers-are-making/#3fbc354e3a1f








Photo © Mary Katherine Wynn | Dreamstime Stock Photos

What if retirement planning could be a happy endeavor?

5 Simple Steps to Heart-Happy Retirement Planning

“Saving money in itself can be a drag,” admits John Beshears, an assistant professor of business administration at Harvard Business School. “My research, as well as that of others, suggests that humans have an innate taste for instant gratification—and it’s difficult to make short-term sacrifices in the pursuit of a long-term gain.”

"The truth of the matter is that if you approach the planning process from a happy place now, you can help set yourself up for a happy retirement later. Check out these five optimistically minded approaches to heart-happy (and disciplined) retirement planning."

1. Indulge in a Goal-Based Guilty Pleasure

2. Give Yourself a Calculated Savings Boost

3. Dabble in Some Wishful Thinking

4. Take a Fresh Start Approach to Your Planning

5. Envision 80-Year-Old You    

Get details from Molly Triffin at: http://www.foxbusiness.com/personal-finance/2015/12/22/5-simple-steps-to-heart-happy-retirement-planning/

The more you save, the less you need for retirement!

“If you sock away just 10% of your income, you might indeed require 80% of your final salary to retire in comfort. But if you save 25%, you could sustain your current lifestyle with perhaps 65%,” according to The Wall Street Journal writer Jonathan Clements. Think about it. If you can get by on less today in order to save more, then you need less to maintain your current level of income in retirement.  Quote from “Why you will need less money than you think for retirement,” WSJ, April 9, 2015.

THe ABCs of 401(k)s

401(k) Plans 101: A Guide to Saving for Retirement by Steve Nicastro. From tax advantages to company matches, here's everything you should know about 401(k)s. http://money.usnews.com/money/blogs/my-money/2014/09/15/401-k-plans-101-a-guide-to-saving-for-retirement

15% is the New Retirement Number

CBS Moneywatch columnist Steve Vernon summarizes the results of research from the Center for Retirement Research at Boston College about how much you need to invest for retirement. The old 10% rule of thumb is history unless you start investing in your 20s. The new number may be 15% which is also supported by earlier research published in the Journal of Financial Planning. The key is starting young, but if you are no longer under 35 you may need to work longer, which is a trend as more "retirees" seek out new careers or self-employment. Check out Vernon's summary at: http://www.cbsnews.com/news/how-much-to-save-for-retirement/
Th e 15% is confirmed by a study at the Center for Retirement Research as reported in the Squared Away blog: http://squaredawayblog.bc.edu/squared-away/how-much-for-the-401k-depends/
They provide a table for age when savings starts and desired retirement age that provides a number (% of salary) and explanation. You can't wait until you're 45 and expect to retire at 62! A similar study was reported in the Journal of Financial Planning that provides even more detailed tables. One can plot how much they have already invested for retirement, their current age, current income, and % of income they plan to replace to find more precise estimates. 

Based on research by Roger Ibbotson, James Xiong, Robert P. Kreitler, Charles F. Kreitler, and Peng Chen

What % of income to save for retirement?

The old rule  of thumb was that you need to say 10% of your income for retirement. However, a number of recent studies conclude that 15% is the appropriate amount. This percent includes an employer's contribution but half of Americans workers get no help from their employer and the self-employed are on their own. Of course you can't wait until you are 40 to start investing 15% of income for retirement. So young workers need to increase their contributions to retirement by 1% (or more) a year to reach the ideal 15%; older workers have few options other than to work longer (which isn't always possible) while reducing current and future consumption expenditures. Bottom line: start saving early and plan to work longer. This info is based on a recent study by the Center for Retirement Resarch at Boston College; check it out at: http://crr.bc.edu/wp-content/uploads/2014/07/IB_14-111.pdf

9 ways pre-retirees crash their retirement

By Kenn Tacchino

1.      Retire too soon (read: Checklist of Retirement-Date Considerations)

2.      Carry debt into retirement

3.      Claim Social Security too soon

4.      Underestimate your life expectancy

5.      Underestimate health-care costs and needs

6.      Using a life-only annuity instead of a joint and survivor annuity for a married couple

7.      Counting on continued work or part-time employment

8.      Underestimating inflation.

9.      Choosing to age in place

http://www.marketwatch.com/story/9-ways-pre-retirees-crash-their-retirement-2014-04-14?pagenumber=1