Market Risk during COVID-19?


Kelly from Sacramento writes the show to ask Ryan to discuss the impact of the COVID-19 pandemic and market volatility, on people’s retirement plans. Ryan explains that people who are approaching retirement or in early retirement need to be very aware of market risk and how it could derail their retirement nest eggs.

Ryan also discusses the 4% rule, and how does not always hold true to projecting out retirement income plans. The 4% rule states that, someone could distribute 4% of their overall portfolio during their retirement years and be confident that they would never run out of money. Back in 2001/2002 and in 2008 this rule didn’t hold true and many people had to put their retirements on hold. In addition to planning around market volatility, people should also be concerned with inflation risk as well. Inflation will decrease the purchasing power of the dollar over time and make goods and services more expensive, which will negatively impact an individual’s retirement.

Last , Ryan gives us a real live clients example of how a market crash during the distribution/retirement phase will devastate someone’s retirement nest egg to the point where they will most likely never recover.

How did COVID-19 impact some people’s retirement savings?

  • People who are close to retiring or in early retirement should not have a significant portion of their nest egg exposed to market risk!
  • In 2001, and 2002 when we saw a market crash it devastated people’s retirement savings and their plans.
  • The same thing happened back in 2008 when we had our last crash. People’s retirement nest eggs were devastated.
  • This is why it’s critical to protect your nest egg.

What is the 4% rule and how does it impact us?

  • It is common belief that someone can withdraw 4% of their total portfolio value throughout their retirement and not run out of money.
  • 2008 taught us that the 4% rule is not always 100% accurate.
  • When we experience a significant drop in the market it jeopardizes people’s retirement income

How do we protect against market crashes and protect our nest egg in the process?

  • We need to create a plan that not only protects against market risk, but also inflation.
  • We could experience up to 4 market crashes over a 30-year period in retirement.
  • Plans need to hold up against market volatility and inflation.

What would a market crash look like if I were distributing money for retirement?

Example: $500,000 (nest egg), taking $20,000/ year (annual distribution for retirement, (4%), -40% market crash

  • $500,000 (nest egg)
  • -$200,000 loss (40% market loss)
  • -$ 20,000(annual distribution)
  • $280,000 (nest egg balance)

In order to get $280,000 back to $500,000, we would need a 79% rate of return.

  • $280,000.00
  • X            1.79
  • $500,000.00