Last week DCDB Daily ran an article by Margarida Correia,
Ms. Correia was, of course, discussing Longevity Risk. But there are other risks that need to be taken into account as part of the retirement planning process. They include:
- Inflation Risk: The potential erosion in the purchasing power of a portfolio in retirement. through cost of living increases.
- Social Security Risk: The risk of entitlements being reduced by the government.
- Unexpected Event Risk: The risk of unforeseen catastrophic circumstances.
- Sequence Risk: The risk of experiencing negative returns during retirement, especially at the beginning of retirement
It’s that last one, Sequence Risk that is most overlooked in the retirement planning process. The order of the sequence of investment returns should be a primary concern for those retirees living off the income and capital of their investments. Witness 2008.
If you really want to get into the details of sequence risk, check out this excellent, detailed article,
Here are the two key takeaways that I got from the article:
First, planning for sequence risk should not be a “one and done” process. It’s asset allocation in a setting that someone called, “reverse dollar-cost averaging.”
Second, sequence risk never really goes away.
Now let me add my own by asking the advisers in the audience: Is there a role for annuities here?
Jerry Kalish is President of National Benefit Services, Inc., a Chicago-based TPA firm. He has been publishing the firm’s