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How to avoid “dollar cost ravaging†in retirement
Wed, Dec 11, 10:04 AM ET, by , BlackRockPatrick: Mark, some 10,000 Americans turn 65 every day, yet the last baby boomer won't turn 65 for another decade. What are the key challenges as they enter retirement and withdrawal mode?
Mark: Retirement investors face an unprecedented future where poor financial planning at the start of retirement can have catastrophic consequences later on. Unrealistic income targets, bad market timing and a lack of diversification are just some of the factors that can make or break a retiree's financial longevity.
Patrick: Is this because we're living longer?
Mark: In part, yes. We all need to plan for a longer unknown. Financial decisions at the beginning of retirement are crucial because they can become amplified over time. For example, retirees are taking more risk to achieve both income and growth, and this is a real concern going forward, especially if there is a market downturn.
Patrick: Ten years into a bull market and the longest economic expansion in history, the investing world is debating whether it's ending, or merely “adjustingâ€. What does this mean for investors preparing for retirement?
Mark: New retirees should be prepared for choppy conditions to continue and be aware of how this could impact the health of their portfolios. Even if a large downturn doesn't occur, retirement is a good time to get better prepared for one. Small swings in portfolio value can be bearable, but recovering from a larger decline while your portfolio is beginning to produce retirement income is challenging. Remember, your portfolio's ability to recover from downturns diminishes when you start taking withdrawals. It will not behave the same way as someone's who's still in saving mode.
Patrick: You describe this problem as “dollar-cost ravaging.†Talk more about what that means.
Mark: Investors have probably heard the term “dollar-cost-averaging,†where you make regularly timed investments to smooth out the risk of “buying high.†Retirees tend to do the opposite. Instead of putting money into their portfolio, they take it out with a regular cadence in the form of income. “Dollar-cost-ravaging†occurs when the market loses value while you're taking withdrawals, especially in the early years of retirement. Because money is coming out rather than going in, it's harder for the retiree to recover their losses when markets rebound. We even saw this during one of the most successful bull markets in our history over the past decade. The sequence of returns matters, and the biggest challenge is a bear market early in your retirement.  If you must take withdrawals to meet expenses, then having a well-constructed, risk-managed portfolio is vital to limiting the damage than can be caused by ravaging market conditions.
Patrick: What should investors do now if they are concerned about dollar cost ravaging?
Mark: For anyone who's drawing income from their portfolio, now is a great time to take a closer look at your investments and recalibrate your portfolio to ensure you are protected against shifting market conditions. Bond yields are still low, but risk has picked up compared with the past decade. That increases the potential for losing portfolio value. Striking the right balance to limit your losses in a declining market is just as important as capturing growth when the market is strong. Your financial advisor can help walk through your income options and present potential outcomes under different market scenarios.
Patrick: Thanks, Mark.
Patrick Nolan is the Portfolio Strategist within BlackRock's Portfolio Solutions group. He is a regular contributor to The Blog.
Investing involves risk, including possible loss of principal. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.  This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date indicated and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and non-proprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking†information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any of these views will come to pass. Reliance upon information in this post is at the sole discretion of the reader. This post contains general information only and does not take into account an individual's financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision. ©2019 BlackRock, Inc. All rights reserved.  BLACKROCK is a registered trademark of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners. USRMH1219U-1021506-1/1
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