You can choose a good adviser, you can reduce investment charges, you can spread your investments, you can have the best strategy, but there is one important factor that will determine if your money will last. It’s a secret that few professionals know, and even if they do know, they don’t like to talk about it !
Before, I give you this ‘insight’ , think for a second about the lottery we call ‘life’, and that based upon your age, you have a rough idea of when you might retire. However, like the lottery of life, the lottery of markets, can be incredibly cruel. Since the 2000’s we have already experienced two market drops of nearly 50%, and just because things are OK now, has no bearing on what it will be like when ‘you’ want to take it easy, and turn your capital into income.
The risk we all face, and retirement’s dirty little secret, is the devastating concept of ‘sequence of returns’. This means that, when you reach ‘critical mass’, your retirement years when all your life’s work is on the line, what happens in the first few years of your retirement, will define how long your money lasts.
It sounds so simple, but nearly everyone misses the fact that if you experience poor market returns at the start of your retirement, it’s nearly impossible to reverse, because the ‘sequence of returns’ creates something that erodes your capital called ‘Pound Cost Ravaging’.
This occurs when you take income from a portfolio that’s volatile or falling in value, and even though the market might recover, your capital does not. This is because pound cost averaging also works in reverse, where the erosion of capital speeds up when income is taken from a volatile portfolio.
Moving from ‘Risk to Safety’ at the most important part of your investment journey is quite literally a life saver. Pushing the ‘pause button’ for a short time to regroup and get your retirement strategy right, can quite literally save your bacon !
Two things are therefore vital, to avoid wealth destruction
1) Preserve your wealth. Reduce risk and volatility. Don’t fall into the trap of thinking retirement is a long time and that ‘average returns’ will provide growth/income and preserve your capital, because they won’t. This is a market myth, perpetuated by an industry that loves risk, and loves hiding it from you within ‘average returns’. Remember its the ‘sequence of returns’ that determines if your money runs out before you do.
2) Choose when you take income. Avoid taking regular income from your investments in a falling market, it just leads to quicker capital erosion. Instead establish lower risk buffer funds that you can draw upon, or decide at what specific time you will take income, and be specific to minimize capital erosion.
Remember, there is a huge financial industry that’s dedicated to risk, and keeping hold of your money. But then I’ve always thought, its not their money, its yours !
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The above is for generic guidance only; its not advice, so always consult your professional advisers before taking or refraining from any action.