Investment Risks that Can Derail Your Retirement

Market Volatility, Interest Rates, Liquidity and the Sequence of Returns

Market Volatility

It seems the lost decade is already the forgotten decade. Between 2001 and 2010, the market went negative 4 out of 10 years. The four negative years were not small adjustments in market value; they were out right bear markets. In 2015, some 401(k)s recovered back to pre-2008 losses.

We’re living in a global community in turbulent times where worldwide markets are affected by political unrest, the threat of terrorism and economic upheaval. Could the lost decade occur again? No one knows, but investors need to position themselves against market losses as much as possible because the new world order is disorder.

Interest Rates

In the past, retirees could depend on a pension, Social Security increases and solid CD rates. The retirement of the World War II and Korean generations is not the retirement of the baby boomers. Unless you’re a government employee or spent time in the military, you don’t have a pension plan. You can no longer take Social Security increases to bank. Three of the last six years had no increases and the three that did were ineffective against the true cost of living.

Interest rates have been artificially low for so long because of the nearly $20 trillion of national debt and three times that of federal and state pension obligations in the future. Interest rates may stay flat for the next decade, so government and corporate bonds could be low-performing investments for a long time.

Liquidity

There are two types of liquidity in retirement. Liquid emergency funds need to be readily available for medical bills, assisted-living expenses and home and auto maintenance. The other liquidity is for portfolio flexibility. Most retirement portfolios are quarantined for income use and are illiquid for other investment opportunities and off-budget items like unscheduled vacations. Liquidity in retirement is a major consideration for your ultimate financial health.

The Sequence of Returns

The rules for accumulating wealth are not the same as distributing your wealth during retirement. Distributions are first subject to a “safe withdrawal rate” and market volatility. If there was one really good reason to meet with a financial advisor, the sequence of returns is it. Seniors routinely withdraw more than their portfolio generates. That, combined with market losses, can cannibalize portfolio principal. And if that wasn’t bad enough, longevity risk can compound the sequence of returns to such a degree that running out of money before death is a high probability.

All four investment risks can derail your retirement, so educate yourself in these areas so you can keep your retirement on track.