Deciding to retire and transition into the spending phase of your financial journey challenges conventional thinking—you stop saving for the future and start spending for your future.
Even if an investor overcomes this mental hurdle, it’s not always smooth sailing. What happens when the stock market experiences a down year? What if subsequent years show little to no growth? Suddenly, your withdrawals represent a larger proportion of what is likely a smaller portfolio because of losses, which can have lasting consequences for a portfolio, as even though the market typically recovers, fewer assets are left to benefit from those recoveries. For some, this could mean depleting retirement funds much sooner than expected.
This scenario illustrates sequence risk. Unfortunately, this risk is beyond an investor’s control and, essentially, a matter of timing and luck. Conversely, market gains in the early years of retirement could enhance the longevity of a portfolio, potentially offsetting spending.
While the market trends upward over the long term, there is no way to accurately time the market in the short run, including deciding the exact year to retire.
To mitigate sequence risk, we employ the Henssler Ten Year Rule, which involves placing 10 years’ worth of spending needs in fixed-income investments that mature annually over rolling 10-year periods. For example, imagine you retired in 2022 when the market declined by 18.13%. Selling investments during such a downturn would likely harm your portfolio. However, if adhering to the Henssler Ten Year Rule, you would have secured your 2022 withdrawal in fixed-income investments purchased back in 2012. At that time, you could have sold equity investments, which, as measured by the total return for the S&P 500 Index, were up 15.99% from the previous year.
In 2022, your 10-year reserves would have decreased to nine years. With the market down nearly 20%, you could avoid selling equities and instead rely on your fixed-income investments. Now, with nine years’ worth of spending needs protected from market volatility, you could wait until the market recovers before selling equity investments. For instance, in 2023, when the market gained 26.26%, you could have then sold equities to replenish your reserves for both 2032 and 2033.
While you still withdraw from your overall portfolio during down years, the 10-year “bucket” is continually replenished during positive market years. Over rolling 10-year periods, stocks are up more than 90% of the time, giving you a strong likelihood of weathering any downturn before needing to sell equity investments.
Fixed-income investments, such as U.S. Treasury Bonds, play a crucial role in reducing portfolio risk. These bonds provide a relatively stable asset class that often moves inversely to stocks. Under the Henssler Ten Year Rule, Treasury bonds are held to maturity, protecting the principal from market volatility. With Treasury bonds backed by the U.S. government, if you purchase a $10,000 bond that matures in 2033, you will receive your $10,000 back regardless of stock market performance. The Henssler Ten Year Rule effectively provides 10 years of uninterrupted income, ensuring stability despite normal market fluctuations.
If you have questions on how to begin shifting your asset allocation for retirement, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166
Listen to the December 7, 2024 “Henssler Money Talks” episode.
This article is for demonstrative and academic purposes and is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
