Two investors retire at different times with exactly the same amount of retirement savings and the same expenses. Retiree 1 lives comfortably and has funds after passing away 30 years later. Retiree 2 faces financial challenges and runs out of money around 25 years before passing away at 30 years.
What happened?
SORR - Sequence of Return Risk
Retiree 1 was fully invested and the market kept going up after he retired for several years. When it did crash, the retirement accounts were significantly higher than when he retired and he was still able to cover expenses comfortably. The market recovered in a couple years and his investments were still significantly higher than when he retired. He was able to leave an inheritance when he passed away.
Retiree 2 was fully invested and the market crashed just before he retired. As a result, he needed to sell investments that had declined significantly to pay for expenses. The market only took a couple years to recover, but the result was devastating and resulted in him running out of money before he passed away.
One solution is for upcoming retirees to have sufficient funds in cash or cash equivalents to cover the 3-5 years initially on the retirement date. There might be others solutions that I 'm not aware of.
We almost were Retiree 2. I retired in 2007, just before the 08/09 Great Recession. We survived because we were not fully invested in equities, and had sufficient fixed income and cash to cover several years of expenses without withdrawing retirement savings. Eventually, almost everything recovered and we were able to have a success retirement until now.
While a combination of fixed income, cash, and maturing CDs covered our expenses enabling us to survive during the Great Recession, YMMV.
This is not financial nor retirement advice. Please consult a professional advisor.
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