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Originally Posted by FurnaceFace
OK, I don't know the ins and outs of a 401k (Slava maybe you can shed light on this) but is it more akin to apension on an RSP? If it's a pension my belief is a pension is essentially a lower risk mutual fund - or more like a diversified fund which helps it avoid wild swings like this. Also can someone not just use part of their 401k or defer it as long as possible by perhaps borrowing against it? There should be other avenues available than converting it all at the worst possible time.
I only really understand the Canadian system the best and in our case we say we have "an RSP" as a blanket term however we typically have a few avenues of registered funds. Also as someone reaches near retirement age they should have converted some of their portfolio to low risk or even guaranteed investments so this sort of volatility doesn't affect them.
I had learned the rule of thumb that whatever your age was, that's the amount of your investments you should have in guaranteed investments. Hence a 25 year old has 25% in certificates or bonds whereas a 60 year old has a lot more locked in.
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There are a few avenues of guaranteed income that people near retirement might want to consider. During times like this people learn the hard lesson that sequence of returns makes an enormous difference when you are withdrawing money.
When you are accumulating the average rate of return is what matters...and truthfully as a long-term buyer you want the prices to drop. (I know that is going to need some further explanation, but I'll move along for now). When you go to withdraw though the average return is only somewhat useful. You need returns to be steady, so that the corresponding income is also steady. There are certain folks in our industry though who fail to apply this truth; they are selling people on the average rates of return even when the client is near retirement. Days like today (and really the last few months) leave those clients making a tough decision: retire later (continue working), take less income from your portfolio, or go back to work.
As far as my comment about the shredder, I was serious. I have been extremely close to buying a bunch of these to give to clients with that advice...but I've never taken the final plunge on that.