“Confusion is a word we have invented for an order which is not understood.” – Henry Miller
Two things matter when you are taking money out of your investments: how much you withdraw and the order of your returns. (The order of returns is also called the sequence of returns.) This is especially true for retirees who are living off of their investments, or in other words, using their investments to pay their living expenses.
A down market can have a substantially negative effect on the income generating potential of a portfolio for the rest of a retiree’s life, making it extremely difficult to “catch up” over time. Let’s take an example of two retirees who have the very same amount in their portfolios. One starts taking his income when the stock market is falling and the other starts taking income when the stock market is going up. Who has more success in the long term? It’s the one who started when the stock market was going up.
Let’s look at it another way. If your portfolio loses 50% the week before you leave this earth, it certainly would be an inconvenience. If your portfolio loses 50% the week after you retire, this will likely impact the quality of your retirement. Should you delay retirement because of this? Well, everyone’s situation is different and sometimes the answer is yes, sometimes no, and sometimes maybe is the truth.
The real question is whether a falling stock market in the early years of retirement will leave you at serious risk of running out of money in your lifetime. That’s just a matter of math. Evaluate both scenarios mathematically when making your decisions about when to retire and how much you can afford to spend in retirement with a solid financial plan.