3 Ways Stock Market Volatility Can Impact your Retirement by Troy Sharpe, CFP®

This video will be one of the most important videos you can watch to understand how your retirement can either be elevated or completely destroyed by market volatility. [music]

Hi, I’m Troy Sharpe, CEO of Oak Harvest Financial Group, CERTIFIED FINANCIAL PLANNER™ Professional (CFP®), host of the Retirement Income Show, and author of the upcoming book, Core4. Market volatility is the enemy of the retiree.

When you retire, when you stop receiving paychecks, you have to take all that money that you’ve saved over the course of your life, and figure out how to invest it, and how to take the income, and how to reduce taxes. In its most basic form, that’s what retirement planning is. The first thing to understand is the timing of your retirement. Does it matter when I retire? Yes, it does. Here’s a $1 million starting portfolio taking $50,000 out for an annual income at the beginning of the year.

If we retired in 2009, by 2018, our $1 million, after $50,000 annual withdrawals, is up to $1.9 million. You’re thinking about doing bathroom renovations, and maybe getting a beach home, and things are going great. You’re really, really stoked. Your $1 million has turned into $2 million. You’re 10 years into retirement and you’ve taken out $50,000 every single year.

Now, if you would have retired in 1999, your $1 million taking the same $50,000 out, 10 years later, in 2008, you would have been left with $365,000. A difference in value of over $1.5 million simply based on the timing of when you retire. The next thing we have to be concerned with is the sequence of the returns that we realize. Meaning, when we retire and start taking income, whether we make an interest that first year, that second year, that third year, the sequence of returns can determine how long our money last, and how much income we can take out. We’re going to look at two different examples.

In the first one, we’re going to show positive returns in the beginning, and then we’re going to flip that on its head and look what happens if those returns just simply were realized in reverse order. We have positive returns here, on a $500,000 retirement portfolio, taking $24,000 out per year. With positive returns in the beginning, this person was left with $696,000 over the course of their retirement. They averaged 6.91% per year, and they withdrew $513,000, and we’re left once again with almost $700,000 after the 10-year period. Now, that same person with negative returns in the beginning, starting with $500,000, taking $24,000 out.

They also averaged 6.91% per year, withdrew $513,000, but they’re left with $71,160. Nothing changed except the sequence of the returns that they realized when they started taking income from their portfolio. The third and final thing about market volatility that we need to understand to help secure our retirement and make it last as long as we do is what we call variance. Variance just simply means, how wide is the range of returns that you realize in retirement. We took the same example here, of flipping the returns upside down like we just did, but instead of having a very wide range of possible outcomes, we narrowed the range of possible outcomes through portfolio design.

What we invest in, how we allocate essentially across the Core4. When our clients come to see us, the most important thing they want us to do is to protect the money. This is where we focus our efforts in building these retirement plans is reducing the range of expected returns for clients that take that as their number one concern in retirement. Here, if you see the returns, they’ve simply narrowed. We only have one return above positive 15%, and one return that’s below negative five. Same situation. They take out $24,000, start with $500,000. At the end of the period, they have $705,000. They average 6.91%, just like the previous slides. Over here, we flipped it upside down.

We put the red number in the beginning years. The positive, over 15%, one event throughout the entire time frame. Average, 6.91%, and they’re left with $676,000. Taking the same $24,000 retirement income withdrawal. It’s not about hitting home runs in retirement. Once you cross over into the retirement phase, and you start taking income out of your portfolio, it’s about managing market volatility. As this last slide shows us, whether the losses occur in the beginning of retirement or the end of retirement, your chances drastically improve, of not running out of money, if you can narrow the range of potential returns, keeping them within that negative five to plus 15 is the ideal zone for many people.

Maybe negative 10 to plus 18. We don’t need home runs. We don’t need plus 20, plus 30, plus 40 because that means we can lose 20%, 30%, 40%, 50% if markets turns south. If you liked this video, make sure to share it with a friend or family member so they can understand the impact that market volatility could potentially have on their retirement income. This could be life-changing, so that they understand this information. Hit the subscribe button down below, and then that bell icon, that’ll notify you when we upload more retirement content so you can make better decisions, be more informed, and stay connected to your money. If you hit the thumbs up button, the like button, that’s going to help other people who watch YouTube know that this content is valuable and they should watch it to help improve their retirement. [music]