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Too Much Risk Can Ruin Your Retirement

By John Benedict

While retirement may spark thoughts of leisure and enjoyment, staying aware of possible uncertainties helps mitigate any future risks that arise. The landscape of this season of life is dotted with unpredictable factors, including the ebb and flow of stock markets, the reality of inflation, the dance of interest rates, and even the mystery of your longevity—all things that may cast shadows on your retirement dreams.

Anticipating and preparing for the unexpected is essential to navigating retirement’s twists and turns successfully. A lengthy retirement that spans two to three decades inevitably brings economic dynamics that can shift dramatically, calling into question the level of risk you should take with your investments. In the following article, we shed light on insights and strategic ideas to help guide you closer to your vision of retirement.

Safe Withdrawal Rate Is More Important Than Rate of Return

When it comes to retirement planning, many people focus solely on the rate of return they can expect from their investments. However, what is often overlooked is the amount you will be withdrawing from your retirement fund each year. This is where the concept of a safe withdrawal rate comes in. How much can you withdraw from your accounts without risking running out of money later on in life? 

The most commonly cited safe withdrawal rate is the 4% rule, which is the theory about how much money you can safely withdraw from your retirement accounts each year without running out of money. The 4% rule became widely publicized after Bill Bengen’s research in 1994, which showed that withdrawing up to 4% of retirement assets, and then adjusting annually for inflation, could sustain the typical 30-year retirement going all the way back to 1926. 

On the surface, it may seem like withdrawing 4% is definitely the way to go. After all, the data goes back nearly 100 years! But it is important to keep in mind that the safe withdrawal rate is just a guideline and should be adjusted according to your personal financial situation and goals. Nevertheless, when you reach retirement and start taking an income from your portfolio, the amount you withdraw from your retirement fund each year should be more important than the rate of return you receive. 

Diversification Is Key

Diversification is a critical aspect of a successful retirement strategy. When you’re working, it’s common for people to have a fairly aggressive investment approach with 100% stocks as they’re accumulating assets and seeking more growth. But when you reach retirement, you shouldn’t keep the same investments you’ve had the last few decades. As we saw during the tech bubble in the early 2000s, the Great Recession in 2007-2009, and the first few months of COVID-19 in 2020, the stock market can drop 30% to 50%, and sometimes it can do that quickly. 

What would your income in retirement look like if you were dependent on a portfolio that was 100% in stocks? 

Situations like those are why we want to have diversification in your investment portfolio. We want to have other assets, besides stocks, that don’t fall nearly as much in a downturn, so that if you need income, we can generate it from those assets while we wait for your stock portfolio to recover.

In addition, this diversification can level out the highs and lows of investment, hopefully giving you more comfort and confidence in your investment and income strategy.

The Emotional Element of Retirement Withdrawals vs. Contributions While Working

Accumulating assets for retirement is often driven by a sense of hope and optimism that you’re working toward a great goal and contributing to it every two weeks. But drawing down your accounts in retirement often brings a completely different emotional experience with heightened anxiety and a fear of loss. In addition, any potential losses feel like a bigger deal, since this is the only pot of money you have, and you don’t want to be forced to go back to work because it’s fallen too much. 

To mitigate this emotional stress, it’s not only important to stay within a safe withdrawal rate range (which can be easier said than done); it’s also critical to have the support of an experienced financial advisor who can provide the technical guidance you need, as well as emotional support and encouragement to stick with the plan. In collaboration with your financial advisor, you can make informed decisions during periods of market turbulence that will help you stay focused on your financial goals.

Assess Your Right Level of Risk

Effectively handling retirement distributions is an intricate process, demanding a delicate balance between technical and emotional elements. If you find yourself grappling with uncertainty or feeling overwhelmed by this process, especially when assessing your risk tolerance, our team at J2 Capital Management is here to explore how we can assist you.

Schedule a meeting online or reach out today to review your risk with a professional. Email us at info@j2cmonline.com or call 248-641-4444.

About John Benedict

John Benedict is CEO, investment advisor representative, and portfolio manager at J2 Capital Management, a boutique financial advisory firm specializing in in-house custom financial planning, tax, estate, and investment management. With over 20 years of experience, John is passionate about helping clients navigate uncertain markets, reduce risk, and plan for a sound future. John combined his talents and passion in statistics and technical analysis to create J2’s tactical strategies, managing them since the beginning of the organization. He is known for being a visionary and continually looking for ways to improve J2’s services and strategies to better serve his clients. John graduated from Central Michigan University with a degree in business administration and finance, and his thoughts on markets and technical analysis have appeared in The Wall Street Journal, Investment News, and on Moneyshow.com. He was also a contributor to the book The StockTwits Edge: 40 Actionable Trade Set-Ups from Real Market Pros. 

When he’s not working, you can find John boating or participating in water sports and spending time with his wife, Janine, and his three children, Jack, Alexis, and Saraphina. To learn more about John, connect with him on LinkedIn. You can also register for his latest webinar on What Makes J2 Capital Management Different From Other Financial Advisors

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