In ancient times, little was known about navigating the oceans. When confronted with an unknown area, mapmakers would often draw in sea-monsters to represent potential dangers. Eventually, explorers learned to navigate these areas and educated the mapmakers. At some point, the sea-monsters all but disappeared from maps. As much, let’s run with this concept. Do you have sea-monsters on your retirement map? Just for fun, let’s identify a retirement sea-beast and a she-beast that may be on your retirement map.
The fabulous beast above was created by Olaus Magnus in 1539. Although Magnus called it a sea pig, let us call it “Sequence-of-Returnosaur.” Sequence-of-Returnosaur represents the unpredictable danger of sequence-of-return risk. This risk, especially early in retirement, can do great damage to your retirement portfolio and possibly to your retirement lifestyle. This is the risk that you suffer terrible investment returns early in retirement while funding your lifestyle from your retirement portfolio. For example, let’s say Sequence-of-Returnosaur inflicts a 30% drop in your portfolio just as you start to spend a reasonable 4% per year. Even if the market recovers 30% the following year, you are not even close to even. In fact, it would take almost a 49% return just to get back to even. But don’t let the Sequence-of-Returnosaur scare you. There are methods to tame this sea-pig such as reducing portfolio risk early in retirement, utilizing variable rate spending strategies, and bond ladders. You should educate yourself on how to handle an encounter with this beast.
The Siren Overspendrous
The gentleman tied to the mast above is Odysseus from Homer’s The Odyssey. In Greek mythology, winged lady creatures called sirens would bewitch sailors causing them to wreck their ships. Curious to hear the siren song, Odysseus tied himself to the mast and put beeswax in his crew’s ears to avoid this fate. Just for fun, let us create a siren and name her Overspendrous. Overspendrous loves to bewitch retirees into spending lavishly early in retirement and thus wrecking their retirement ship. To avoid this fate you can try tying yourself to a mast or putting beeswax in your ears, but it might be simpler to identify how much you can safely spend in retirement and then exercise some discipline. Don’t let Overspendrous convince you to wreck your retirement portfolio. Talk to other retirees or your financial advisor to determine how much you can reasonably spend from your retirement portfolio.
Sequence-of-Returnosaur and Overspendrous represent just two of the potential dangers you may encounter on your retirement voyage. Educate yourself on other topics such as:
· Stock concentration
· Healthcare costs
· Typical retiree spending patterns
· Social security optimization
So, as you contemplate your retirement, educate yourself by talking to other retirees, reading topical books and speaking with a financial advisor. By educating yourself, you can enjoy a pleasant retirement voyage and avoid those nasty sea-monsters!
As usual, if you have questions, please feel free to email me at Don.Clements@raymondjames.com. I would love to hear from you.
Boxer, Alexander. “Monstrous Sea-Pig.” Idols of the Cave, idolsofthecave.com/latest-wonder/4-the-monstrous-sea-pig-featuring-allis-markham-part-1-nov-2014/.
“James Ford Bell Library.” University Libraries, bell.lib.umn.edu/index.html.