Sequence Risk

Finance Allah Shmoop What is sequence risk and how can

it derail retirement All right people You worked as a

plumber The requisite You know butt crack growth started when

you fell in love with non light Miller beer in

your early twenties And it grew as you did in

direct proportion With your savings you put as much as

you could into your four Oh one k overtime You

grew a plumbing in parts business nicely You owned a

small building you invested in stocks that paid a dividend

If you bought bonds that matured at different times you

bought a last to die life insurance policy for your

kids and you paid off your home mortgage Yeah So

at the end of your working career you have a

whole mess of assets which you will gradually sell off

the hey for Hawaii resort bills to pay from my

ties with pink umbrellas in him And you know to

pay for his and her massages for you and your

wife of forty three years So where does sequence risk

come alive in this otherwise beautiful American dream story Well

let's start with the bonds When you were fifty three

you put ten grand into a six percent corporate fund

coming do twenty years later at seventy one Now with

only two years ago until that bond matures Well you

know you have a few more interest payments due coming

to you And then that bond pays ten grand in

two years It's original principles being returned to you Luckily

you bought one of these bonds every two years in

your fifties and sixties such that you knew they would

come to our rather pay back your original principle of

ten grand every two years for a decade in change

You have all this cash cash Ola coming to you

from other places as well It comes in the form

of dividends from your stocks and the likely sale of

your building and a whole bunch of other little assets

that you'll slowly pull out of Your four Oh one

k pay taxes on it So where does sequence risk

then Come in Like what's wrong with all this Well

for you Joe the plumber you've done an excellent job

diversifying the cash liquidity needs that you'll have to fund

the rest of your life together You know with your

wife The cash comes in waves gentle waves of ten

grand here twenty grand there of stream of dividends So

you always have cash handy to pay your bills It's

really easy right Well what about Bob Bob the plumber

not the builder He made the same money you did

but has everything in growth stocks and one big fat

building He owns no bonds no other cash producing entities

That's it So he's been doing just fine selling shares

Obama's on Facebook Google Netflix And if you have a

growth stocks would performed well But things never work out

so well in the real world After President Oprah decided

to regulate Silicon Valley those stocks all got cut in

half and then worse and kept falling and falling and

falling And well now Bob has no liquidity because he

depended on selling growth stocks to fund his life Even

though the stocks are crazy cheap now he still has

to keep selling them Pay taxes on well any gains

he may still have left from when he bottom a

while ago and then use those cash proceeds to hopefully

be able to fund his life He also has that

building which is in a bear market now and it

can't really sell so he'll get only a third for

it If he has to sell it right now can

he borrow against it Kenny margin against his stocks Really

risky If you start doing that because of stocks keep

going down then your margin executes a call provisions and

basically you lose all of your stocks meaning if stocks

go down and your margin rates are more than fifty

percent the broker's likely will force you to sell even

more stocks And so you lose even more money and

it means probably a lot fewer mai tais for Bob

So sequence risk is all about retirement planning so that

retirees have oodles of cash coming in regularly safely to

fund the lives they want you know in their golden

years there Why Well because most hotels won't take flush

valves or trap vents or toilet seats as payment eh