Sequencing risk and the impact of early spending after settlement   

Without proper wealth orientation, and settlement planning this means that both investment and longevity risk rest with the individual plaintiff. Taken together with the unique human life transition experience of the plaintiff, first through their life altering event and then leading up to, at, and after receiving their recovery, it should not hard to imagine where things can go wrong. Unfortunately that is not always the case if the lens is cloudy.

Experiencing a market drop in the early years following settlement can create serious problems that go beyond the immediate drop in value of your invested settlement proceeds.  Such a drop in value, combined with excessive withdrawals, could reach a point where your settlement proceeds might not last as long as you planned and need. If you have no other means to support yourself, possibly with significant medical needs, and without family resources and support, that could prove catastrophic. 

What is Decumulation?

William F. Sharpe, the Nobel Prize-winning professor of finance, emeritus at Stanford University's Graduate School of Business has described decumulation as "the nastiest, hardest problem in finance": the challenge of managing finances during retirement. This critical phase, known as the decumulation stage, involves transitioning from accumulating wealth to drawing down assets to sustain one’s lifestyle. But decumulation risk is not just the province of the retiree.

Sequencing and Decumulation risk is a factor for recipients of legal settlements and should be addressed in advance of settlement

Professor Sharpe acknowledged that there is no easy solution to the Decumulation dilemma.

• Retirement planning (and I am adding settlement planning) involves grappling with two major uncertainties: Investment Uncertainty and the variability of investment returns.
• Mortality Uncertainty: The unpredictability of lifespan.
• As a Certified Financial Transitionist I am going to add identifying Transition Traits that are unique to each person and each transition and applying the appropriate collaboraive tools to

What is A Certified Financial Transitionist? (CeFT) (4structures.com)

The core of the challenge lies in striking a delicate balance between three essential aspects:

1. Current Needs and Wants: Ensuring sufficient income to meet immediate financial requirements, including day-to-day expenses and desired lifestyle choices.
2. Long-Term Sustainability: Ensuring that the accumulated wealth (through savings, settlement proceeds and investments thereon) lasts throughout one’s lifetime, even as life expectancy and potential investment returns remain uncertain.
3. The personal side of money: Personal values and processes and how this impacts decisions and outcomes.

For recipients of legal settlements, some financial products such as structured settlement annuities (like annuities with cost-of-living adjustments) can mitigate investment uncertainty and address mortaliuty risk.

Further Reading that May Be Helpful

• Monte Carlo Simulation/Analysis in Structured Settlements and Settlement Planning Process (4structures.com)
• A Personal Injury Victim's Dilemma | Lending Settlement Money (4structures.com)
• The Passage Stage of Financial Transitions (4structures.com)
• Market Based Structured Settlements | How They Work (4structures.com)