Sequence of return risk in retirement

Q & ASequence of return risk in retirement
NICHOLAS OH asked 6 years ago

Hi Peter,
Thanks for the great content. I like the fact that you focus quite a number of your webinars for platinum members on financial planning topics. 
Regarding this one
How do you view the sequence of return risk when investing in retirement ? I believe that during retirement, the sequence of returns matters more when one is withdrawing from the portfolio. A person who retires right before a bear market would have less favorable outcome than someone who retires at the start of a bull market even if overall the CAGR over the retirement period for both retirees are the same.

Explaining Sequence of Return Risk and Possible Solutions

I have seen financial planners in US use complicated tools like Monte Carlo analysis to model the possible different scenarios based on past market returns and assign a probability of success to the retirement over different rolling periods. I dont see an easy way to do this for someone investing mainly in Malaysia ? Personally do you account for sequence of return risk in your projections or assume a linear consistent return in your projections ? Do you apply any stress test on your projections to mimic real world volatility in equity markets ? 

1 Answers
Peter Lim Staff answered 5 years ago

See the below great example regarding investing during retirement.

Basically, u should split your money into 2 basket rather than just 1.

One is “income ladder”, where it have enough money for 1 to 7 years, depending on how u invest. The main purpose for “income ladder” is for u to sustain for a couple of years when market’s valuation is low.

The other is for Growth, where that asset class is expected to earn good returns (north of 10%).