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Finance: What is sequence risk, and how can it derail retirement? 1 Views
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Transcript
- 00:00
Finance Allah Shmoop What is sequence risk and how can
- 00:05
it derail retirement All right people You worked as a
- 00:10
plumber The requisite You know butt crack growth started when
- 00:14
you fell in love with non light Miller beer in
- 00:17
your early twenties And it grew as you did in
Full Transcript
- 00:19
direct proportion With your savings you put as much as
- 00:22
you could into your four Oh one k overtime You
- 00:25
grew a plumbing in parts business nicely You owned a
- 00:27
small building you invested in stocks that paid a dividend
- 00:31
If you bought bonds that matured at different times you
- 00:34
bought a last to die life insurance policy for your
- 00:37
kids and you paid off your home mortgage Yeah So
- 00:40
at the end of your working career you have a
- 00:41
whole mess of assets which you will gradually sell off
- 00:45
the hey for Hawaii resort bills to pay from my
- 00:47
ties with pink umbrellas in him And you know to
- 00:50
pay for his and her massages for you and your
- 00:52
wife of forty three years So where does sequence risk
- 00:56
come alive in this otherwise beautiful American dream story Well
- 01:00
let's start with the bonds When you were fifty three
- 01:02
you put ten grand into a six percent corporate fund
- 01:04
coming do twenty years later at seventy one Now with
- 01:07
only two years ago until that bond matures Well you
- 01:09
know you have a few more interest payments due coming
- 01:12
to you And then that bond pays ten grand in
- 01:14
two years It's original principles being returned to you Luckily
- 01:18
you bought one of these bonds every two years in
- 01:21
your fifties and sixties such that you knew they would
- 01:23
come to our rather pay back your original principle of
- 01:26
ten grand every two years for a decade in change
- 01:30
You have all this cash cash Ola coming to you
- 01:33
from other places as well It comes in the form
- 01:35
of dividends from your stocks and the likely sale of
- 01:38
your building and a whole bunch of other little assets
- 01:41
that you'll slowly pull out of Your four Oh one
- 01:43
k pay taxes on it So where does sequence risk
- 01:46
then Come in Like what's wrong with all this Well
- 01:48
for you Joe the plumber you've done an excellent job
- 01:51
diversifying the cash liquidity needs that you'll have to fund
- 01:55
the rest of your life together You know with your
- 01:57
wife The cash comes in waves gentle waves of ten
- 02:01
grand here twenty grand there of stream of dividends So
- 02:04
you always have cash handy to pay your bills It's
- 02:07
really easy right Well what about Bob Bob the plumber
- 02:10
not the builder He made the same money you did
- 02:13
but has everything in growth stocks and one big fat
- 02:17
building He owns no bonds no other cash producing entities
- 02:20
That's it So he's been doing just fine selling shares
- 02:23
Obama's on Facebook Google Netflix And if you have a
- 02:25
growth stocks would performed well But things never work out
- 02:28
so well in the real world After President Oprah decided
- 02:31
to regulate Silicon Valley those stocks all got cut in
- 02:35
half and then worse and kept falling and falling and
- 02:37
falling And well now Bob has no liquidity because he
- 02:40
depended on selling growth stocks to fund his life Even
- 02:44
though the stocks are crazy cheap now he still has
- 02:46
to keep selling them Pay taxes on well any gains
- 02:49
he may still have left from when he bottom a
- 02:51
while ago and then use those cash proceeds to hopefully
- 02:55
be able to fund his life He also has that
- 02:57
building which is in a bear market now and it
- 02:59
can't really sell so he'll get only a third for
- 03:02
it If he has to sell it right now can
- 03:04
he borrow against it Kenny margin against his stocks Really
- 03:08
risky If you start doing that because of stocks keep
- 03:10
going down then your margin executes a call provisions and
- 03:14
basically you lose all of your stocks meaning if stocks
- 03:17
go down and your margin rates are more than fifty
- 03:19
percent the broker's likely will force you to sell even
- 03:22
more stocks And so you lose even more money and
- 03:24
it means probably a lot fewer mai tais for Bob
- 03:28
So sequence risk is all about retirement planning so that
- 03:31
retirees have oodles of cash coming in regularly safely to
- 03:35
fund the lives they want you know in their golden
- 03:38
years there Why Well because most hotels won't take flush
- 03:42
valves or trap vents or toilet seats as payment eh
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