Managing Your JRB Portfolio in Retirement

By Mitchell J. Smilowitz, CPA

If you are within 10 years of retirement, it’s a good time to review your portfolio and make any necessary adjustments. This article looks at how to manage market volatility when you retire, what financial planners call “sequence-of-return risk.”

Understanding Sequence-of-Return Risk

When you retire, you don’t suddenly become a short-term investor. Your retirement is likely to last 20-30 years or more. You will still need to invest for the long-term. At the same time, you are likely to begin drawing from your savings to pay for your expenses in retirement.

The challenge of balancing the need for long-term growth, which involves investing in assets with greater volatility, such as stocks, and the short-term need for cash to finance current retirement spending is called sequence-of-return risk. During a period when the stock market is rising, there’s no problem withdrawing from your equity investments; you are locking in the gains by selling assets when their value is high. The “risk” occurs when stock prices decline. Unless you have more conservative assets, you will be forced to sell your equity investments at depreciated values, thus locking in a loss.

How can you “sequence” the withdrawals from your retirement account to avoid taking money from your equity investments when stock prices have declined?

Managing Sequence-of-Return Risk

Many people adopt a “bucketing” approach as a tool for managing sequence-of-return risk. Here’s how it works.

  • Establish a spending strategy that allows you to estimate how much of your retirement savings you need each month and can sustainably afford to withdraw so your assets last your lifetime.
  • Place at least five years of your expected withdrawals into an “income bucket.” Invest these funds in a low volatility investment such as the JRB Stable Value Fund. The JRB Stable Value Fund generates a guaranteed rate of return and allows you to minimize the effect of volatility on the investments you plan to use for income in retirement.
  • Invest the remainder of your retirement savings in a “long-term bucket.” These funds can be more aggressively invested in the equity market, with the primary objective of growth. Since you don’t need these funds soon, you don’t have to worry as much about short-term volatility.
  • When the stock market is up, refresh the “income bucket” so it continues to hold at least five years of your income needs. Because the “income bucket” has several years of spending, you do not need to add funds to it during years when your long-term investments have declined. This strategy offers an effective way to manage sequence-of-return risk.

Managing your assets in retirement requires a different mindset than most of us use when the focus is solely on accumulating assets for the long-term. There is no one right answer to this challenge. Your response will be unique. But you don’t have to face these questions alone. The Joint Retirement Board is here to assist. To get started, please call us at 888-JRB-FREE (572-3733) or send us an email.