Your Retirement Dreams Could Vanish With This Mistake

I’ve seen it time and time again. Savvy professionals, brilliant in their fields, make a fundamental error that threatens to unravel their retirement dreams. They fall for the siren song of market timing, believing they can outsmart the unpredictable beast that is the stock market. But here’s the harsh truth: trying to time the market is like catching lightning in a bottle. It’s not just tricky; it’s nearly impossible.

Let’s talk about sequence risk. The retirement killer lurks in the shadows, waiting to pounce when you least expect it. Sequence risk isn’t just about market downturns. It’s about when those downturns occur and how much you withdraw from your portfolio. It’s particularly dangerous in the years just before and after retirement.

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The Math That Can Break Your Retirement

Picture this: It’s 2019, and you’re eyeing retirement in the next 4–5 years. Your million-dollar portfolio feels like a comfortable cushion. Then 2020 hits and COVID-19 sends the market into a tailspin. Your portfolio takes a 20% hit. No problem, you think. It’ll bounce back.

But here’s where the math gets tricky. A 20% loss on a million dollars is $200,000. You’re down to $800,000. The market recovers and goes up 20%. Great news, right? Not quite. A 20% gain on $800,000 is only $160,000. You’re still $40,000 short of where you started. This isn’t just a numbers game. It could mean working an extra couple of years to make up the difference.

Now, imagine you’re already retired when this happens. You must withdraw funds to support your lifestyle while the market is down. You’re not just dealing with paper losses; you’re locking in those losses with every withdrawal. It’s a double whammy that can quickly derail your retirement plans.

The Time Crunch No One Talks About

Here’s another factor that often gets overlooked: time. As we get older, we have less and less time for the market to “rebound.” With fewer shares in your portfolio (thanks to those withdrawals during market downturns), you have less opportunity to participate in any recovery. This puts the sequence of returns risk as one of the most critical aspects of retirement planning that very few people talk about.

Do you think you can avoid this by timing the market? Think again. Even professional fund managers who dedicate their careers to this task struggle to do it consistently. Between work, family, and the constant ping of social media notifications, when will you find the time to analyze market trends, pore over company fundamentals, and make split-second decisions?

The Tools You Didn’t Know You Needed

If timing the market is off the table, what can you do? It’s not about finding a magic bullet. It’s about understanding and utilizing various financial tools to help mitigate risk. This is where many people, even successful business owners, fall short. They focus solely on their investment portfolio, neglecting other powerful tools.

For instance, consider annuities. Now, before you roll your eyes, hear me out. When used correctly, an annuity can provide a stream of income that isn’t tied to market performance. This can take pressure off your investment accounts during market downturns.

Another often misunderstood tool is the reverse mortgage. It’s not right for everyone, but sometimes, tapping into home equity can provide a crucial buffer against sequence risk. The key is understanding these tools well before you need them to make educated decisions in your moment of need.

The Blind Spot That Could Cost You Everything

I often see a mistake where business owners don’t continually evaluate the professionals they work with. Just because you’ve worked with a financial advisor for 15 years doesn’t mean they’re still the best fit for your evolving needs. The same goes for your CPA, estate attorney, or business attorney.

Remember, this is your money. You are its steward. As your financial life grows more complex, you may need to level up the expertise of your advisors. As the saying goes, “What got you here won’t get you there.”

The Education Gap You Need to Bridge

Financial literacy isn’t just about understanding market trends or balancing a checkbook. When it comes to managing sequence risk, it’s about having a basic understanding of the tools available to you. Stop relying on social media pundits to tell you what to do with your money. Do your own research. If you need clarity, pick up the phone and talk to licensed professionals.

We live in an age of information overload. However, all the online articles are no substitute for a conversation with someone who can answer your specific questions. If you don’t click with one professional, move on. There’s no shortage of qualified experts who can help you navigate these complex waters.

The Timeline Most People Get Wrong

When should you start thinking about sequence risk? The answer might surprise you. While it’s never too early to start planning for retirement, you should begin focusing specifically on sequence risk about 5 to 7 years before you plan to retire.

This is the time to start creating a financial plan with different scenarios. What happens if the market drops 20% the year before you retire? What if it surges? Having a plan prevents you from making snap decisions about financial tools when you have little knowledge. It also helps you avoid making overly emotional decisions you may regret later.

The Moving Target You Can’t Ignore

Here’s something crucial: your financial plan isn’t a “set it and forget it” document. It’s a living, breathing strategy that needs to evolve as you do. Your risk tolerance will change over time. You may see risk differently after having your first child or getting that big promotion.

Your asset allocation needs to align with your current risk tolerance, not the tolerance you had five years ago. As you approach retirement, this becomes even more critical. Readjust your allocation according to your current risk tolerance, then understand what tools you have available to mitigate any risk beyond that.

The Reality Check Most Advisors Won’t Give You

Here’s a hard truth: most people carry more risk in their portfolios than they’re comfortable with. Our firm uses Nitrogen (formerly Riskalyze) to evaluate a person’s risk tolerance. Time and again, people’s perceived risk tolerance doesn’t match their capacity for risk.

This mismatch can be devastating when sequence risk comes into play. If you take on more risk than you can handle, you’re more likely to make emotional decisions during market downturns — exactly when you need to stay the course.

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The Business Owner’s Secret Weapon

If you’re a business owner, you have a unique set of tools at your disposal regarding retirement planning. I see three main options:

1. Shut the lights, lock the door, and walk away. This means no money set aside and no sale. It’s the least advisable option but surprisingly common.

2. Optimize your business’s cash flow and build a retirement plan without selling. This option at least gives you a pool of money to retire on.

3. Combine option two with a business sale. This option provides you with two pools of money: the retirement account you’ve built using cash from the business and the proceeds from the sale.

The third option gives you the most flexibility in managing sequence risk. With two pools of money, you have more levers to pull when market conditions turn unfavorable.

The Path Forward

Navigating sequence risk isn’t about predicting the future or timing the market. It’s about building a robust, flexible strategy to weather various market conditions. It’s about understanding the tools at your disposal and knowing when and how to use them.

Don’t let the siren song of market timing lure you onto the rocks. Instead, focus on what you can control: your financial education, risk management strategy, and the quality of advice you receive. Your retirement dreams are too important to leave to chance or misguided attempts at outsmarting the market.

Remember, in the world of retirement planning, slow and steady doesn’t just win the race — it helps ensure you’ll have the resources to enjoy the finish line when you get there.

About the Author: Mr. Clark is a licensed advisor and member of the National Referral Network. He has been in the financial services industry since 2011. Over that time, he has successfully raised $42 million for a handful of companies and completed his MBA program. As part of the National Referral Network, his goal is to build his clients’ financial teams, which will ensure that all the pieces of their financial puzzle are working together. You can connect with Mr. Clark on LinkedIn.

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Disclaimer: Although Mr. Clark is a licensed advisor, he is neither your advisor nor a CPA or Tax Attorney. Nothing discussed or shared should be taken as financial advice for any individual case or business situation. This information is for educational purposes only and is not intended to be tax advice or as an act of solicitation and/or recommendation to buy or sell any financial instrument.