Retirement Planning With The 'Tism - Part 4: Sequence Of Returns
Compounding - The most powerful double-edged sword in the world
This week’s free post hit on a dozen tips for young people. I was ‘inspired’ by a news article that had 10 tips from experts that left a lot to be desired.
It works out well since Part 4 of our Retirement Planning with the ‘Tism series is going to piggyback off Part 3. In Part 3 we showed how your ‘average’ return isn’t your ‘average’ return when you are making contributions to your portfolio over time.
In today’s post, we are going to look at the sequence of return risk you face with your portfolio.
This post is particularly relevant today as we see people making poor decisions around the recent dip in the market. Young investors are getting scared out of their investments and stopping contributions to the markets. You are likely dropping the ball on a lifetime opportunity.
[Get Caught Up:
Retirement with the ‘Tism Part 1 covered risks of Common Savings Rules like 50/30/20
Retirement with the ‘Tism Part 2 covered risks of the 4% Withdrawal Rule
What is Sequence of Returns?
First, let’s define what sequence of returns means.
Sequence of returns is the order in which your returns happens. The risk with the sequence of returns is that the timing of a down market corresponds with when you need to take withdrawals from your account OR if you don’t take advantage of down markets when you are young.
If the market is down, you want it to happen when you are in an accumulation stage, not when you are in your decumulation (draw down) stage or near retirement.
The latter may sound familiar if you follow BowTiedBull, because he is spot on. The wealthy have more assets than income.
If your income is > 3% of your assets, then asset prices down is a good guy for you. You get a chance to make up ground on the wealthy. I’ll say it again in quotes for you:
“If your income is > 3% of your total net worth, you want asset prices down so you can accumulate more”
-F’er paraphrasing BTB
Let’s prove it out before going on to explain other important takeaways on your sequence of returns.