WHEN DOES A 4% RATE OF RETURN EQUAL 1.5%?

The answer is when you are in retirement.  I talk to lots of people who are entering retirement and the one thing I try to stress is that it is a different ballgame and requires different strategies for managing your wealth.  The objective typically changes from one of growing your money to one of preserving your money and generating income.  Managing your tax liability also becomes extremely important.

One of the most basic risks that many people are not aware of is what is referred to as Sequence of Return risk.  What that means is that the order of returns in retirement can have a drastic impact on your wealth.  The basic idea is that in retirement you are selling your investable assets versus contributing towards your nest egg.  Therefore, losses hurt you more in retirement as you are potentially selling when things are down.  This helped you in your working years because you were able to buy more when the market was down, basically buying when things are on sale.  Another issue is the fact that losses are not the same as gains.  If you lose 50% of your investable assets, you need to make 100% just to get back to even.  If you looked at the S&P 500 from December 31, 1999 through December 31, 2015, your annual rate of return was 4.06%.  This was not a good time for the U.S. stock market.  If you were retired during this time and withdrew 4% per year, increasing by 3% a year to keep pace with inflation, guess what your rate of return was?  As you probably already guessed, it was 1.5%.  Not having a different strategy to deal with this risk in retirement can be hazardous to your wealth.  My suggestion is to understand the game or get someone who does… don’t gamble with your retirement.

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IMPORTANT NOTE: The materials are general in nature and do not address your specific situation. For your specific investment needs, please discuss your individual circumstances with your representative. All indices are unmanaged and investors cannot actually invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses. Past performance does not guarantee future results. Due to industry regulations, comments are not permitted on this blog. If you would like to contact the author, please email us at info@iwstrategists.com.

Bruce Horowitz is a Registered Representative with/and offers Securities and Advisory Services through Commonwealth Financial Network, Member FINRA/SIPC, a Registered Investment Adviser. CA Insurance License # 0B66129. Innovative Wealth Strategists is located at 6767 Forest Lawn Drive, Suite 120, Los Angeles, CA 90068.  This communication is strictly intended for individuals residing in the states of AK,CA,CO,CT,FL,HI,NV,TN,WA. No offers may be made or accepted from any resident outside these states due to various state regulations and registration requirements regarding investment products and services. Please review our Terms of Use here:http://www.commonwealth.com/termsofuse.html