In a recent PlanAdviser.com article, John Manganaro discusses with Michael Rosenberg, head of investment-only defined contribution business for Prudential Investments, how market conditions that define the decade before a person’s retirement can drastically alter their lifestyle once they retire. Rosenberg cites recent Prudential research that shows that the value of a portfolio can be depleted at roughly twice the rate when an investor suffers a 2008-type bear market event immediately before starting withdrawals. As a result, Rosenberg stresses the importance of
“Those familiar with the rules of football will immediately understand the Red Zone terminology,” Rosenberg said. “It’s the time period starting approximately 10 years before retirement when one needs to shift the thinking from the long-term accumulation and start thinking deeply about not just withdrawals and spending, but also about the big risks you could face.”
Rosenberg points out that just a few years of negative returns right before or after a person starts taking distributions can quickly erase decades of retirement savings, “often to the point of being unable to generate enough income to last a lifetime.” As a result, it may be prudent to lower one’s portfolio risk as they near retirement. On the flip-side, Rosenberg also states that younger people who under-invest in more aggressive asset classes such as equities are also running the risk of not having sufficient assets to support the kind of retirement lifestyle they are hoping for.
Simulations performed by Prudential show that a pair of investors that experience the same average returns may have significantly different ending wealth depending on the order of the sequence of returns. As a result, Rosenberg suggests a “Red Zone offense”–an investment plan that takes measured risks and avoids unnecessary mistakes as retirement approaches.
AAII has published a number of articles on the impact the sequence of returns can have on your investment wealth. Here is sample:
- The Sequence in Which Returns Occur Affects Your Wealth
- Reduce Stock Exposure in Retirement, or Gradually Increase It?
- Managing Cash Flow in Retirement
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