By Gail MarksJarvis
WWR Article Summary (tl;dr) Although balanced investments have earned 8 percent annually on average since 1926, you can never expect the average to happen in a single year or even a few years. So before you plan to retire and remove savings each year to live on, financial experts say it is a good idea to prepare other sources of income.
Is retirement starting to tempt you?
Maybe you peer into your 401(k) and think: “Not bad. Should I go for it?”
Perhaps you’ve even run some numbers on a calculator to assure yourself that you can remove 4 or 5 percent of your savings each year for living expenses, or your financial adviser confirms you have plenty of money to last to age 90.
You know about the so-called 4 percent rule, the rule financial planners use to make sure you don’t spend too much and run out of money too early in retirement.
You figure you will live within the rule, but stretch it a bit, maybe withdrawing 5 percent of your savings each year. You tell yourself: “What could go wrong? I can take this leap.”
There’s just one thing. It’s called sequence of returns. And it can go wrong. If it does, instead of your money lasting through retirement, it may run out while you’re still feeling pretty good and enjoying life.
This potential disaster increasingly is getting attention from financial advisers. Financial planner Michael Kitces told a ballroom full of advisers at the Retirement Income Summit in Chicago this month that they cannot let their clients ignore the risk.
In a nutshell it goes like this: Typically, when people look at their retirement money with a financial planner, they figure they will invest the money and make a return, or a gain, on their savings every year. So as they go through retirement, each year they will remove some money to live on, but the remaining money will be invested and presumably grow.