Don’t Be Fortune’s Fool – Protecting Your Retirement Income from Sequence of Returns Risk
“Shallow men believe in luck or in circumstance. Strong men believe in cause and effect.”
That’s my hometown boy Ralph Waldo Emerson, proving that even the brightest lights can be flummoxed by the vagaries of retirement planning.
“Oh, I am fortune’s fool!” This time it’s Shakespeare, the only line I recall from Romeo and Juliet, which bored me to tears in high school. I was likely unhappy at the lack of hot love scenes – sweltering implications escaped me at age 15.
Yet why did that line stick? A friend once lamented, after my career had been crushed in the latest of a string of financial crises – I’m a living catalog of the finance industry’s ability to nurture, then devour its children – if my middle name was Sisyphus.
I was too busy eating a whole chocolate cake to answer directly; the circumstances called for strong medicine. I’m not likely cursed by gods or men; just bad timing, born at the wrong moment, circumstance and coincidence, impartial fate.
It’s hard not to take it personally, until one notices the countless victims, so many less resilient to hard blows. For a big pudding, I’m tough as boots; I’ve had little choice in the matter.
My father said something, and I’ve quoted it often, during a Celtics-Nicks game in 1972. They were titans then, clashing, nationally televised. The network announcers didn’t savvy our team, made grating remarks – so thought we Boston partisans.
In the first period, the Celts were hustling, beating the New Yorkers to the ball. “The Celtics sure seem to be getting the lucky bounces tonight,” said the gormless color man. Dad grunted, and shivered the air from his Naugahyde throne: “Mmm-Hrmmp!”
Uh, oh. That’s the noise he’d make right before ordering me to clear the foot-thick ice block from the snowed-in driveway, or to express his astonishment that the wasp’s nest he’d mentioned, nestled in the porch eaves, was still live and buzzing. “Didn’t I already tell you…” The sense memory makes me quail: Mmm-Hrmmp!
That day, in front of our new color TV, I wasn’t his target of ire. Dad softly revealed: “It’s funny how the lucky bounces go to the team that’s playing the hardest.”
Hokey old words, wise as our man Emerson. I once shared dad’s thoughts with a gang of hysterical, resentful, underachieving sales-traders in Moscow. It was funny to see how they pulled themselves up, got back to work with determination and vengeance. Good; the better they performed, the bigger my bonus. Philosophical Greeks and Concordians know how to motivate.
That’s how we plan for retirement: with focus and industry, we dive for the ball, run the floor hard, play tough defense when bears show their claws. Yet we need to admit it: raw chance can unhorse us, pardon the mixed metaphor. We need to discuss a dangerous foe now, fearsome as Willis Read or Walt Frazier, an ill-understood factor: sequence of returns risk.
I was studying a case that showed two hypothetical clients, with $1 million socked away for retirement, who stopped working just three years apart. Your retirement advisor or planning team can easily provide graphics to show you the numbers. Here is the gist: chance and circumstance meant the difference between a long comfortable retirement and shockingly enforced poverty.
It all depended on when the two subjects retired. One stopped working during a major market turndown, in 2000; her retirement portfolio took serious losses for three years. Withdrawals to support life and limb became doubly costly: more assets had to be sold to raise funds, leaving fewer resources to recover in line with the markets.
In this example, the imaginary retiree went bankrupt after 15 years. The other mythical party left the workforce three years later, took a few hits along the way, too, yet after 18 years, still had most of his million to live on. Both enjoyed the same rate of return in the period, just shy of 5%. One flourished, the other perished, caused by an unlucky sequence of events.
As a first step, as retirement approaches, pay down your debts, particularly those exorbitant-interest credit cards. The less money that flows out each month, the more choices left in your hands, especially in hard times.
The next principle: reduce volatility in your portfolio. This was once boilerplate, but with stock returns breaking records it can be hard to resist temptation – you think, ‘just one more year or two’. So, as retirement nears, diversify into safer stocks, bonds and assets that provide a solid seawall when the waves rise. There’s no easy way to balance things; assets and dreams differ. Luckily, advisors relish the challenge of fine-tuning a portfolio to suit the client’s special conditions.
Investments that produce income are good teammates. Stocks that pay dividends are an obvious choice, but don’t forget annuities, staunch allies in volatile times. Bonds always make sense. Consider rental properties: many find them a headache, but for the right customers, they’re a wonderful way to lock-in steady income in good times or bad.
Assemble a long-term spending plan. Consider how your needs will change as you age. At age 65, you may want to travel and maintain an active lifestyle. At 75, you could be settling down, with the comfort of your home, say, a priority. Ten years on, healthcare and leaving a legacy might come into focus. Ask your advisor to help create a withdrawal and spending plan that suits each phase of your retirement.
Lady Luck may not want you to know it, but you can still beat her odds by skillful planning – as always, with the help of professionals.