A collection of insightful and informative articles from Myerson Wealth's “Recipes for Success” newsletter
Don’t Spoil Your Dinner!
When crafting a dinner party menu, many things come into play. Who are the guests at the table? Do they have any food restrictions or aversions? Does the menu follow a logical culinary progression? Slowly and meticulously I build the menu, course upon course, until I’m satisfied I have the right balance of ingredients and flavors all served in the ideal sequence. If you’re interested in seeing the progression of one of my more recent menus, it can be found here.
Now imagine having the dessert (in this case, Chocolate Bourbon Croissant Bread Pudding) immediately after the salad, and before the fish or main course. Don’t you think that would completely spoil the rest of the meal?
News flash! Many of us unwittingly expose our investments to the risk of “out of sequence” returns. During asset accumulation years (assuming a disciplined strategy that avoids jumping out of the market in the event of a downturn), the order in which the returns are applied to that investment (the “sequence of returns”) is irrelevant.
However, when we get to the stage in our lives where we wish to begin taking distributions from these investments, the sequence of returns getting applied to the remaining balance can have a significant impact on the value of said investments.
Let’s assume we have a year the market plunges (inevitable). Let’s also assume one investment “pot” from which all distributions are made. Now, in the year following the market decline, we have to remove funds at a low point in order to maintain our lifestyle. These funds are withdrawn without allowing the market to rebound—and the impact can unfortunately be substantial. This is precisely the reason money managers and investment advisors warn us to begin changing the blend of our portfolio as we get closer to retirement. And once at retirement, the portfolio usually becomes ultra-conservative, oftentimes consisting entirely of cash and bonds.
The example above may well have been an acceptable strategy ten years ago. However, with returns on a fixed income portfolio at all-time lows, many “would-be” retirees are either not retiring when they would otherwise have wished to do so, or are faced with the prospect of uncomfortably squeezing their distributions to make them last longer.
But, what if one could leave some (or many) of those assets exposed to the market in order to take advantage of the higher returns inherent with a riskier strategy, but never take distributions from this source of funds in years the market lost value? Instead, what if another source of funds existed that was available to be used until the market-exposed investments were back to baseline? And lastly, what if this other source of funds also increased in value in years when the market went up, but never lost a dime in periods of market decline? Wouldn’t this blend of assets allow for a much longer and more satisfying retirement plan, notwithstanding the sequence of returns?
To the extent you’d like to see validation on this concept, we have created an easy-to-understand analysis of the strategy. Please feel free to email us at firstname.lastname@example.org (or leave a comment below) and ask for the Sequence of Returns Analysis. We’d be happy to share it with you.