Back to the Basics

In April 2016, Back to the Basics, Income Planning, Investment Management, Steward Articlesby Adam Cufr

Retirement planning is essentially a risk management process. If markets experience uninterrupted growth, inflation remains low, interest rates are fairly normal, and health remains good, there’s not much left to plan for. Just go and have fun! Well, as luck would have it, life happens, and the above outcomes aren’t guaranteed. In essence then, we need to plan away as many risks as possible, allowing you to go forward and live fully in retirement.

There’s one specific risk that deserves some attention, because it’s often overlooked. We’ll call this retirement date risk. This risk is for those who haven’t yet retired, but are interested in doing so in the next few years.

One of the concepts we’ve discussed before pertains to the sequence of returns you receive in the early years of retirement. Basically, if you retire and plan to live off of money that is invested at-risk in the markets, experiencing poor returns in the early years can have disastrous effects on the long-term value of your nest egg. In fact, those who retire when markets are poor are substantially more likely to deplete their money before retirement has ended. Why? Imagine what happens when you add withdrawals to an already-declining portfolio. Not only is the portfolio losing value faster, but there is less money in the portfolio to recover when markets grow again. The math just isn’t on your side in that scenario.

What is often overlooked is the math problem that exists when markets are poor the few years leading up to retirement. For most, those years are critical to achieving the target nest egg size to allow for necessary levels of retirement income. Shave off those last few years of growth and there’s not nearly as much compounding on the portfolio to create the level of financial security most retirees desire.

For example, say you’ve saved $500,000 toward retirement and plan to retire in three years. Assuming 6% returns, that nest egg would grow to $595,000 in just those three years, without adding any new money! Conversely, if markets declined 2% in that same time, you’d have $490,000. While that amount of money is nothing to sneeze at, the difference of $105,000 could go a long way to supplement Social Security or a pension income, or even secure 20 years worth of long term care insurance premiums of $5,000 per year!

In effect, timing the date of your retirement can and will have a major impact on your retirement income and financial comfort. But who can predict the performance of the markets? Nobody. What you can do, though, is to think long and hard about the amount of risk you take in the years leading up to retirement. Achieving just a 4% growth rate in the example above (by taking less risk) would result in $562,432, That’s still a difference of over $72,000!

Now, as you’ll see in the Briefcase Study this month, some situations allow for more risk–taking than others. The key is to evaluate your risk exposure relative to your needs.

The joke is, just retire at the right time and everything will be fine. Without that kind of clarity, we must be aware of the risks and plan accordingly. Don’t let retirement date risk sneak up on you. Now that you know, what will you do? Contact us if we can help.


Adam Cufr, RICP® (Retirement Income Certified Professional®) is a financial advisor and founding principal of Fourth Dimension Financial Group, LLC providing personal finance and retirement planning services. Adam is a Columnist for Retirement Advisor Magazine. He is also a sought-after media commentator and thought leader. Adam was named one of The 20 Most Creative People In Insurance in 2015 and is a columnist for Retirement Advisor Magazine and the author of Off the Record – Secrets to Building a Successful Retirement and a Lasting Legacy.

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