You may be familiar with one of the risks that you face in retirement called the “sequence of return risk”. This is the risk that you will have an unfavorable series of negative returns (especially early in retirement) AND simultaneously distribute money to cover your regular expenses. This causes these investment accounts to run out of money much sooner than anticipated.
Fortunately, there are many ways to avoid the sequence of return risk if a retiree needs regular income from a portfolio (I’ve written plenty about that in the past). Nevertheless, for those who DO side skirt the sequence of return risk, they will find that it rears its ugly head again when required minimum distributions (RMDs) begin.
Why is that? RMD’s require an annual distribution from an investment portfolio. With most financial institutions, this will require a pro rata sale of the investment holdings. What if the investment is significantly down in value during a market downturn when it needs to be sold? The sequence of return risk all over again!
Here is where a provision from the IRS can come in handy. The IRS allows that the total RMD that is required to be taken can be taken from any IRA that the owner wishes. That means that the required distribution could come from an account that did NOT lose money during that year. But this may not BE an option if all your accounts went down.
So……there is great wisdom in having a portion of your investment accounts allocated to strategies that cannot lose money when the stock market loses money. That way, in the years of stock market losses you still have an IRA account that you can take RMD’s from that will not cause you heartburn.
In our next article we will discuss the most common types of strategies that could be used for these kinds of accounts.
if you have any questions please feel free to contact me.