Potential for a Market Correction When Drawing Income From Your Retirement Accounts

There are Many Risks in Retirement, But, With Today’s Market Valuation, One of The Biggest Risks is The Potential for a Market Correction While You Are Drawing Income From Your Retirement Accounts.

Academically, this risk is defined as sequence of returns risk; but, most people have no idea this is lurking around the bend as they enter retirement. To help illustrate this risk to pre-retirees and retirees, we developed a simple tool called The Money Cycle.

EXPLAINING THE MONEY CYCLE

The Money Cycle is something that we all go through during our lifetime, and there are three phases: accumulation, preservation, and distribution. 

The accumulation phase starts early in life. When we are accumulating assets, we are typically willing to take more risk with this money because we have a long-time horizon. Let’s face it, we’re working and will be working for a long time, if we have losses, we have time to make it back. Or, if the market crashes, we can wait for it to come back because we have a long-time horizon before we enter the second phase—the preservation phase. 

In the preservation phase, we start preserving some of the assets that we’ve accumulated throughout our lifetime as we get closer to our retirement goals. Now there’s less time to make mistakes with your money or experience major volatility because you’re going to need this money sooner rather than later. This step prepares us for the third and final stage: distribution. 

The distribution phase is for both distribution to us in retirement and to our family upon our passing. This is when you begin to draw from what you’ve accumulated and preserved and start taking an income from your savings and investments. 

A mistake people make is going directly from the accumulation phase into distribution. They continue to invest as if they are preparing for retirement a long way out, when they are already retired or about to retire. The problem with this is that if you’re taking distributions when the market has big corrections, as it always does, you’re essentially forced to sell your investments for income when the market is down. You can never make that money back and you could deplete your savings much faster as a result. This is how you run the risk of running out of money later in life. 

As retirement advisors educating our clients of this risk, it is important to remind people that two of the ten worst one-day drops in the history of the stock market are still painfully fresh in investors’ minds. Even though the market recovered to blissful highs, we are still seeing large amounts of volatility within the stock market each day. Consumer sentiment seems to be one of nervousness, and this should encourage people to start putting measures in place to protect their retirement. 

As advisors, our job is to help protect our clients from market uncertainty and the tendency to make poor financial decisions based upon emotion. 

In today’s economic environment, there are three major dangers that could derail your retirement: market risk, interest rate risk, and sequence of returns risk. Working with an advisor that has a clear understanding and ability to navigate these risks for their clients will help bring more peace of mind to those they serve. 

The Biggest Risks: What Makes Investors Vulnerable?

First, let’s quickly define the three major dangers investors face in today’s volatile marketplace. To continue reading, click HERE

Securities offered through J.W. Cole Financial, Inc. (JWC) Member FINRA/SIPC.  Advisory Services offered through J.W. Cole Advisors (JWCA).FedSavvy Educational Solutions and JWC/JWCA are unaffiliated entities. Securities are not FDIC insured or guaranteed and may lose value.  Investments are not guaranteed and you can lose money.  This presentation is for educational purposes only and is not an offer to buy or sell an investment. Neither FedSavvy Educational Solutions nor JWC/JWCA is tax or legal advisors and this information should not be considered tax or legal advice.  Consult with a tax and/or legal advisor for such issues.