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.

What is the Negative Sequence of Return Risk and How Does it Affect Your Retirement?

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 6 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%).