| Tuesday, I showed you some simple math to prove it doesn’t matter if you stumble out of the gates right after you invest. But I also said it only counts if you’re not withdrawing money from your portfolio at the same time. If you’re withdrawing money, you could upset your entire financial future. Why? It’s like trimming a tree sapling that’s already having trouble growing. It will take even longer and have to work much harder before it’s fully grown than if you trimmed it after a growth spurt. Here’s some math to help illustrate: Scenario A – 10% loss first: Initial Investment: $100,000 Market value after a 10% loss: $90,000 Market value after $4k withdrawal: $86,000 Market value after a 20% gain: $103,200 Scenario B – 20% gain first: Initial Investment: $100,000 Market value after a 20% gain: $120,000 Market value after $4k withdrawal: $116,000 Market value after a 10% loss: $104,400 This is called Sequence of Returns risk. Ask anyone who retired in 2007 if this is something to be scared of. The solution So how do we make sure you don’t become a victim of Sequence of Returns Risk? Just ask our Level 3 Financial Zen Members (the ones within 5 years of Financial Zen). When you’re 5 years out, we start building 10 years of living expenses OUTSIDE of your portfolio. And then the REST goes into your long-term portfolio. During the good years, we’ll replace living expenses from long-term gains. But in DOWN years, we won’t touch it, so it has time to grow back big and strong. The two bucket system eliminates Sequence of Returns risk. If only Financial Zen had been around in 2007… |
