Molly and Sandra. Timing is Everything.

Would you want to leave your retirement security to chance? Probably not.

Many retirees, however, do just that. Why?

Because they don’t understand the importance of the Timing of their retirement.

Luck often plays a key role in determining whether a retiree’s income continues for years and years, or runs out early.

You can’t know in advance if the year you pick to retire will be a good one or a bad one for stocks. If it happens to be a bad one, like 2000 was, or 2008, it can mean the difference between retirement success, and retirement failure.

Let’s take a look at a hypothetical scenario.

To understand the importance of Timing Risk, imagine two investors, Molly and Sandra. They’re quite similar.

Firstly, Molly and Sandra have accumulated the same amount of savings: $1,000,000. 2 Second, Molly and Sandra have similar appetites for risk. Their investment portfolios are also similar. Each is comprised of 60% stocks, 30% bonds, and 10% cash. Both Molly and Sandra wish to draw the same $5,000 of monthly income from their investment portfolios.

What’s different about Molly and Sandra?

Just one thing. Luck.

Molly’s lucky. She picks a year to retire that’s a good one for stocks. Her portfolio enjoys gains over four consecutive years; 4%, 5%, 9%, and 7%, respectively.

Sandra has bad luck. She chooses to retire just when stock prices begin to plunge. Sandra’s portfolio suffers a 20% loss in year one and a 14% loss in year two.

In years three and four, Sandra’s portfolio rebounds. She enjoys gains of 11% in year 3, and 13% in year 4.

What does this really mean?

It means a lot.

But here’s what’s remarkable.

After only four years, Sandra has $416,000 less than Molly! $416,000 less? How can this happen?

It’s simple. Mathematics.

Sandra’s bad luck in the timing of her retirement meant that she was forced to withdraw money from her portfolio just when it began to suffer investment losses. Each $5,000 withdrawal was partly comprised of selling some of the stocks in her portfolio. As share prices declined, Sandra had to sell more shares each month to generate the same amount of income. Moreover, once those shares were sold, they were no longer available in her portfolio to increase its value as share prices began to recover in years 3 and 4. Losing $416,000 is a big price for Sandra to pay…simply for bad timing.

Timing Risk, therefore, is an issue that no retiree should prudently ignore. Your own retirement security is too important to leave to chance.

The good news is, with the help of a financial advisor, you may be able to achieve a measure of protection against Timing Risk.

Just ask for help. 

There’s just no need to have your retirement security left to good luck or bad.


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