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Understanding the sequence of returns risk: Why timing can be important in retirement

By Tsuneko Nakatani, CPA, MBA

Although ‘time is money’ is a popular adage, when it comes to retirement, it’s often timing that matters most. Significant losses or depletions to your savings early in retirement can shrink your nest egg. This is known as the sequence of returns risk, and it is an important concept to know about so you can adequately plan for your financial wellness in retirement.

Let’s take a closer look at some important considerations that can help create financial security later in life.

Avoiding early losses

Losses and significant depletions occurring early in retirement can have significant consequences for your portfolio. Reducing the size of your retirement nest egg means that any possible future gains would now accrue off a smaller base, so you may not have ample time to benefit from a market recovery, particularly if you need to make additional withdrawals from your retirement account.

Minimizing risks yet maintaining equity exposure

It may seem that a simple solution for reducing a retiree’s sequence of returns risk would be for you to reduce your equity holdings in your portfolio in favor of fixed-income investments. However, this approach compromises the portfolio’s upside potential and may lead to quicker– and premature – reduction of your long-term savings.

Finding solutions that hedge against risk

Whether you’re in your 40s or 50s and looking for upside investment potential or are nearing your retirement years and find guaranteed options more appealing, annuity solutions can address a range of long-term retirement planning needs. Income annuities are a useful hedge against sequence of returns risk for two main reasons: 1) they provide a guaranteed source of lifetime income that is not correlated to market ups and downs or interest rate fluctuations, and 2) annuity income, lowers the withdrawals that you might need to take to cover expenses. This is particularly good news should the market perform poorly in the early years of one’s retirement because these solutions can help retirees avoid selling at the bottom.

Closing the “risk gap” supports growth

Often emotions can influence your investment decisions, particularly if you’ve been burned before. Fear of losses may leave worried investors sitting on the sidelines. Often there’s a gap between the exposure investors are willing to take and the exposure that may be needed to potentially grow your retirement nest eggs. A variable annuity with the purchase of an optional accumulation benefit rider addresses this “risk perception gap” because it can provide equity exposure coupled with principal protection on the initial investment. Those who utilize this retirement planning solution aren’t facing sequencing risks during those critical, early years of their retirement.

Without proper planning, the sequence of returns early in retirement can have a significant consequence to your financial well-being later on. Let’s talk about your priorities and work together to discuss strategies that ensure you can enjoy the retirement you’ve worked hard to create.

*Guarantees are based on the claims‐paying ability of the issuer. For variable annuities, guarantees do not apply to monies allocated to the variable investment options as they are subject to market risk and will fluctuate in value. Withdrawals from annuities may be subject to ordinary income taxes and, if made prior to age 59½, may be subject to a 10% IRS penalty. Surrender charges may also apply. Certain New York Life variable annuites provide access to an accumulation benefit rider called the Investment Preservation Rider 4.0(IPR) which guarantees all premium payments from a loss that are made in the first policy year (less any proportional withdrawals) after the completion of a holding period. The IPR provides principal protection but does not protect the owner’s investment from day‐to‐day market fluctuations or against losses that could be realized prior to completion of the holding period. Annuities contain certain fees, risks, limitations and restrictions. Investors should speak to a financial professional for costs and complete details

Tsuneko Nakatani CPA, MBA

NYLife Securities LLC
(425) 462-4448 (direct), (206) 290-3086 (mobile) tnakatani@newyorklife.com
10885 NE 4th Street, Suite 1400, Bellevue, WA 98004

With experience in commercial banking, financial management, and as a CPA, Tsuneko is passionate about advising individuals and businesses with financial planning, income protection, and wealth accumulation/distribution. She serves as a Financial Services Professional* for New York Life from 2012. She currently specializes in long-term care and retirement/estate planning.