No. of Recommendations: 10
What's the crucial bit of information about the first few years after retirement?
That it's the initial few years, right? But isn't EVERY few years the first years of the rest of
your (retirement) life? So what makes the 1st and 2nd years any more special than the 9th and 10th years?



They are in fact qualitatively different in two ways.

First, consider the retirement as a given segment of time.
We don't know in advance how long it will be, but it's finite, with a start and an end.
The start of that sequence is more important than the end, in terms of sequence-of-returns.
That risk, within that segment, is a diminishing curve, no matter the age interval it covers.
So, a period later in retirement is less sensitive to a period earlier in retirement.
On this view, the issue is not actually years since retirement but years till death do us part.

And, kind of separately, it's important because the whole process can be viewed as:
Accumulate...accumulate...accumulate...accumulate...retire...spend...spend...[spend...]...croak.
No matter what age retirement is, and no matter how many "spend" repetitions there are, the first "spend" interval is the most important in terms of sequence risk.

Yes, one could simply observe two individuals who retire at ages 60 and 65.
The risk for their respective intervals 65-70 at first seems the same.
So, on the surface, it seems that the "first few years" of the first guy is equal in risk to the "second few years" of the second guy.
Suggesting that there is nothing special about the 60-65 period for the first guy.
But, in reality, each of them is going to retire at a given date and die at a given date when all is said and done.
They probably have different size pots of money on retirement day, different expenditure rates,
different rates of return during retirement, and different sequences of return.
Critically, no matter what all those numbers turn out to be, year 1 of retirement *for each of
them* is higher risk than year 10 of retirement for that same person, for sequence-of-returns risk.

And, viewed yet another way, a guy who retires at age 87 doesn't have a lot of sequence-of-returns risk.
In reality the whole conversation applies only to those whose retirement depends, in part, on earnings made during retirement.
For a person retiring at age 87, statistically that isn't a factor.
He (or, less likely, she) will be dead before the investment income is more than a rounding error, whether it's good or bad.
From this it follows that sequence of return risk in period N is not the same as the risk in period N+1.
At period N+1 you're older.

Jim
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