In light of the poor performance of the US stock market in 2018, many folks are talking about the danger of planning your retirement based on average returns (or worse, the improved returns of the last 9 years) only to run into a sustained “bear market” where their returns to match the expenses they planned for when they retire. The industry has a name for this – “Sequence of Return Risk.”
The fact is that the market returns you get in the first 10 years of retirement have a dramatic impact on the overall performance of retirement funds. If you get stuck in a bad market at the start, it is very difficult to climb out of it. For those who have recently retired, this 10 months could be devastating, especially if this market continues. Forbes as a good article on ways to manage sequence of return risk.
We are still 19 months away from FI, and since the typical time it takes for a market to get back to where it was is 18-24 months, I think we’ll be OK. For right now, I comfort myself with the idea that right now, there are a lot of stocks “on sale” that I am dollar-cost averaging in my purchases, while I continue with the plan. Hopefully you all have the fortitude to stick with your plan as well.
Other articles about Sequence of Return Risk
Mr. 39 Month