Will Sequence Risk Cause You to Run Out Of Money?

Don't Let Sequence Risk Ruin Your Retirement!
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[@davidfolts5893]

Thanks for all your great KZbin content during 2023. I always look forward to a new video arrival from you. Your commentary cuts to the chase and is an excellent example of the vital few versus the trivial many when presenting important financial ideas.

[@whynot8082]

Take the 2.4 and buy an annuity for lifetime income. Why worry about all this? Peace of mind is a critical component of retirement

[@nfaoussoukouyate1963]

Some people retirement with $400 dollars

[@nfaoussoukouyate1963]

Yes sir $400,00 is not bad people look like me

[@alphamale2363]

A cash stash is always nice to have.

[@whynot8082]

Cash stash loses value every year

[@alphamale2363]

@@whynot8082 But low taxes and big ACA subsidies are nice.

[@jhy2kmoney]

I did plan to retire at 62 but I delayed by 18 months to 63 and half for insurance purpose ( COBRA ). I have more money from Social Security and 401K. Your scenario 2 years difference but the balance were the same $500000 and ran out of money sooner ?

[@bysykler4959]

5:25 How do the first 3 year balances drop when this sequence begins with three significant market increases?

[@FinancialFastLane]

The left side is showing the first 3 years which was the original sequence but then when I shuffle or change the order of the returns on the right side we can see the different outcomes.

[@deloresbryant202]

Thank you for sharing this and bringing this situation to our attention. My question is, "Are you saying that, Its better to retire two years earlier to avoid sequence risk? Rather than retire at maximum age? Or, does age even matter when we retire?

[@FinancialFastLane]

No, I am not saying to retire two years earlier. No body can predict which years the market will be up and which will be down. You just want to understand that you need a strategy in place to protect against sequence risk so that if it does happen to you it is not devastating.

[@deloresbryant202]

@@FinancialFastLane thanks for clarity

[@victorsixtythree]

In your example comparing retiring in 1998 vs retiring in 2000, what withdrawal rate did you use? At about the 8:31 mark you say you used a 4% withdrawal rate in the examples, but doing a bit of math (I only looked at the first year of withdrawals) it looks more like you used a 6% withdrawal rate. My understanding of the 4% withdrawal rate derived from Bengen's paper is that a 4% withdrawal rate succeeded in the beginning nest egg lasting at least 30 years in all years that were looked at. So, would the 4% withdrawal rate protect you from sequence of returns risk in all historical conditions?

[@FinancialFastLane]

In the first example/simulation a 4% withdrawal rate and a 3% inflation rate was used as mentioned. The second example where comparing retiring in 1998 vs retiring in 2000, a withdrawal of a flat $30,000 per year and no inflation was used. Bengen's paper that you refer to established the "4% safe withdrawal rate" and it was true back when the study was done (early 1990's). Now days the 4% rule is considered more risky and no longer safe because of the changes in the economy and interest rates. Thank you for you comment!

[@victorsixtythree]

@@FinancialFastLaneThank you for the clarification.

[@nfaoussoukouyate1963]

After 20 years

[@jameswilson4732]

So I should go back to selling drugs?

[@deloresbryant202]

😂😂

[@SantaBarbaraAlberto]

The problem is not sequence risks for running out of money because those risks are known. The problem is the unknown risks and issues such as health, weather, or worldwide conflicts. Even economic disasters like the country debt or social security running out of money. Unknown risks are discrete and unmitigatable.

[@FinancialFastLane]

The unknown risks you speak of are the market risks. Sequence risk is related to the timing of those events. The two types of risk are very much related and both need to be prepared for and managed.