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Investor education

April 23, 2020

Sequence of returns risk is highest near retirement

Consider employing a Cash Wedge Strategy to help manage volatility.

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In retirement, there are three potential threats to your financial well-being:

  • Longevity risk: You may outlive your savings
  • Inflation risk: The cost of living may be higher than you planned for
  • Market risk: Market volatility may decrease the value of your portfolio
    • Sequence of returns risk: A subset of market risk where the market falls just before or early in your retirement, making it difficult to recover your savings

Market risk—specifically sequence of returns risk—is perhaps the most unpredictable and harmful to your financial well-being.  This is especially true at or around your retirement date.

That’s where a Cash Wedge Strategy can help.

What is it?

A Cash Wedge Strategy can help to steady your retirement income in times of volatility. The goal is to allocate a portion of your portfolio to cash to help meet your current income needs, while still diversifying the rest of your portfolio so you can benefit from participating in the market.

Who should consider it?

Retirees who rely on their portfolio for a regular source of income, and are concerned with potential market volatility might consider employing a Cash Wedge Strategy.

What are the benefits?

Employing a Cash Wedge Strategy can help you:

  • Reduce the impact of sequence of returns risk on your portfolio
  • Increase portfolio liquidity to better manage large purchases or unexpected expenses
  • Ensure short term income is not subject to market declines

How does the Cash Wedge Strategy work?

This approach can help protect your portfolio in times of market volatility, while still allowing you to participate in the markets.

Your advisor can help allocate your retirement portfolio into three components:

Cash Wedge Startegy Charts

1. Cash wedge (10%). A portion of your projected retirement income (often one year’s worth) is allocated to liquid, conservative investments (e.g., Money Market). You will draw your retirement income from this. 2. Shorter term, conservative investments (20%). Approximately two years’ worth of projected retirement income is allocated into a low volatility short-term investment [e.g., guaranteed investment certificates, guaranteed interest contracts or a bond fund], providing stability with some potential for growth. In years two and three, you will draw on these to replenish the Cash Wedge. 3. Personalized diversification (70%). The rest of your portfolio is allocated to match your individual investment profile. Over time any profits are moved from this part of the portfolio into the cash wedge or shorter-term portion to create income throughout your retirement.

Speak to your advisor about implementing a Cash Wedge Strategy to minimize your sequence of returns risk as you enter retirement.

This content is provided for information purposes only and is not intended to provide specific individual financial, investment, tax, accounting or legal advice and should not be relied upon in that regard and does not constitute a specific offer to buy and/or sell securities. Information contained in this document has been compiled from sources believed to be reliable, but no representation or warranty, express or implied, is made with respect to its timeliness or accuracy.

Case studies presented are hypothetical in nature and are not intended to be representative of actual client scenarios. Each client will have individual personal income or tax situations that may have additional complexities outside the scope of materials discussed in this document. Investors should seek professional investment advice and/or the advice of a tax advisor for a comprehensive review of their personal situation prior to implementing any investment strategy.

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