When it comes to retirement planning or income planning, many Americans subscribe to one of two approaches. The first suggests that you take around 4% from your stock/bond portfolio each year as income. The second suggests that you place a significant portion of your assets into an annuity so that you can generate guaranteed income for life.
Mike Decker, founder of Kedrec and author of the book, “How to Retire on Time,” believes that these strategies may be riskier than people realize.
According to Decker, “the first option risks accentuating losses by potentially taking income at the wrong time. This is called ‘Sequence of Returns Risk.’ That doesn’t seem prudent when you consider the retirement principle of income, which suggests that you never pull income from accounts that have received significant losses.”
For those who have not heard about Sequence of Returns Risk, here’s an example. If your accounts were down 10 percent, it would take an 11 percent gain just to break even. If your account goes down 30 percent, it would take a 43 percent gain just to break even. If you withdrew income from that account, it would be even harder to recover.
The greater the loss, the harder it is to recover. When you pull income from an account that has already experienced a significant loss, you accentuate the loss even more, which can compromise your ability to stay retired.
“The other common retirement strategy,” Decker says, “suggests that you…