Plan For the Sequence of Return Risk to Make Your Retirement Savings Last
There are a lot of ways to calculate how much money you need to save to retire. Once you reach retirement, though, a lot can influence how long that money lasts, including the year you retire.
As personal finance site One Cent At a Time explains, when you retire can have a huge impact on how long your savings last. Even if you retire with the same amount of money and withdraw it at the same rate as someone else, if you start in different years, one of you could end up with a lot more money at the end.
The reason for this is what's known as the sequence of return risk. Say three portfolios average 10% every year. There will still be ups and downs each year. If person A starts retirement on an up year and withdraws very little money, they'll have more in their account that can go up in the next year. However, if person B starts retirement in a down year and starts withdrawing money, they're going to handicap their ability to draw on market returns over successive years.
The first 10-15 years of your retirement are highly susceptible to this risk, as it can drastically affect how much money you have earning returns in your account. You can check out the source link for a lot more data on this. The best way to combat this, the site concludes, is to stick with a four percent withdrawal rate every year. As long as you stick with that, you should have a better than average shot of keeping your returns high throughout 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 Sequence of Returns Risk and How to Manage It | One Cent At a Time