Timing of Retirement Investing Losses

Continuing with the saga of the timing of retirement investing losses . . .

The first question posed earlier related to the timing of losses to any one lump sum investment over its lifetime. There, timing didn’t make any difference. But, timing does matter to a pool of such individual investments that grows over time with new investment dollars, and then shrinks as the money is withdrawn and spent. There, you want to have your losses early. You don’t want them right when you retire. Timing of losses does affect the value of your nest egg in this scenario.

The reason is much more logical than the answer to question one. It is easily envisioned by considering the first few days of building your anticipated pool of retirement investments – when it might have consisted of a small initial investment into a mutual fund. Any loss that happened to it then could change its terminal value a lot, but it wouldn’t affect the values of subsequent lump sum investments. A loss 40 years from now, however, will whack every investment you ever made into this pool, at least all that are still in there.

Most of us gradually build up our retirement investment assets over our working years. The total reaches its largest amount virtually at retirement, and then we draw it down gradually over our years in retirement. So, the most important time to avoid significant losses is right at retirement. From then on, of course, avoiding losses remains important for the reasons cited earlier – limited if any earned income coming in, and the difficulty of reducing your standard of living at that stage of life.

Patently obvious to the most casual observer, you say? Maybe so. Question one was the tricky one, not question two. But, we all know of people devastated by a market downturn right when they were retiring, or planning to retire, but then couldn’t. And, not just former Enron employees.

So, how do you keep your investment risk down while still going after good returns? Some thought on that next time.