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Pensionize Your Nest Egg: How to Use Product Allocation to Create a Guaranteed Income for Life, 2nd Edition by Moshe A. Milevsky, Alexandra C. Macqueen

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3 How the Sequence of Returns Can Ruin Your Retirement

We know that in the back of your mind you might be wondering, “But isn’t a solid portfolio of stocks and bonds good enough to finance my retirement?” After all, the investment industry has been preaching that, over the long term, there is no better place for your money than its mutual funds. This question brings us to the topics of downside protection and the curse of the sequence of returns. And no, this curse isn’t some ancient medieval wizardry.

For many years members of the financial services industry—egged on by the media and even academics (but we’re not naming names)—have preached the virtues of stocks, equity, and the buy-and-hold theory of investing. No doubt you have seen mountain-like charts of what a mere $1 or £1 invested back in the 1880s would have grown to by the year 2014. You might have also heard that the compound rate of return (or growth rate) from a diversified portfolio of stocks has been around 7 percent, after inflation, during the past century or so. This is true. We don’t dispute any of it. But it also might be irrelevant when it comes to retirement income planning, and here is why.

How Long Will the Money Last?

Perhaps you are approaching retirement and you have a lump-sum nest egg valued at half a million dollars, or a million dollars, or more. No matter what T-bills and markets have done up until now, you are looking forward, not backward, and you are ready to turn your retirement savings ...

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