How to Avoid Sequence of Return Risk in Your LIRP

David explains how, normally, we think of the sequence of return risk as the risk associated with the order in which you experience investment returns in your stock market portfolio in retirement.

There are a couple of different ways you can safeguard yourself against sequence of return risk. 

The first one is to allocate money to an annuity that provides for your income during those early years of retirement so that you aren’t forced to take money out of the stock market. The second option is to build up cash value as long as you start with enough time before you retire. You can build up cash value inside your LIRP, and you can use that to pay for lifestyle expenses during the down years in the first 10 years of retirement.

Lastly, you can shift money out of your stock market portfolio into what David refers to as time-segmented portfolios – short-term debt instruments designed to mature when you need the money.

Segmented portfolios are a safe and productive way to mitigate sequence of return risk in the first 10 years of retirement.

In Power of Zero, David describes 3 basic types of LIRP: the growth in your cash account being linked to investment bonds in the insurance companies of the general portfolio, the Interest Rate Sensitive Universal Life, and the so-called Variable Universal Life (VUL).

For those of you who have VUL, it isn’t necessarily time to panic, says Nelson.


Mentioned in this episode:

David’s books: Power of Zero, Look Before Your LIRP, The Volatility Shield, Tax-Free Income for Life and The Infinity Code (free video series)

@mcknightandco on Twitter 

@davidcmcknight on Instagram

David McKnight on YouTube

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