What Is Sequence-of-Returns Risk?

What Is Sequence-of-Returns Risk?

Sequence-of-returns risk is the risk that poor investment returns early in retirement can have an outsized impact on your long-term financial plan.

It is not only about the average return you earn. It is about the order in which returns happen.

This risk becomes especially important when you are withdrawing money from your portfolio. If the market declines early in retirement and you continue taking withdrawals, you may be forced to sell investments while values are down. That can leave fewer assets available to participate in a later recovery.

Why It Matters More in Retirement

During your working years, a market downturn can be uncomfortable, but you may still have time, income, and ongoing contributions. You are often buying during downturns.

In retirement, you may be selling during downturns.

That difference matters.

Two retirees can earn the same average return over a 20-year period and still have very different outcomes if one experiences losses early and the other experiences losses later. The early-loss retiree may run into trouble faster because withdrawals during down years can permanently reduce the asset base.

A Simple Example

Imagine two retirees with the same starting portfolio and the same average return over time. One gets strong returns early in retirement and weaker returns later. The other gets weak returns early and stronger returns later.

The averages may look similar, but the outcomes can be very different because both retirees are taking income along the way.

The retiree who faces early losses may have to sell more shares to generate the same income. That can make it harder for the account to recover, even if the market later improves.

How Retirees Can Address It

Sequence-of-returns risk cannot be eliminated, but it can be planned for.

Asset Maximization Group - Learn More Content Pack | For compliance review before publication Potential strategies may include:

• Maintaining a cash reserve

• Creating a volatility buffer

• Diversifying income sources

• Reducing withdrawals during down markets when possible

• Coordinating guaranteed or protected income sources

• Segmenting assets by time horizon

• Reviewing risk before retirement begins

The goal is to avoid being forced into bad decisions at bad times.

The Key Question

If the market fell significantly during your first few years of retirement, where would your income come from?

If the answer is, "I would sell the same investments anyway," your plan may need a closer look.

disclaimer:

Asset Maximization Group provides educational information and retirement planning strategy. This material is not intended to provide individualized investment, tax, or legal advice. Tax laws and retirement rules can change, and their impact depends on each person's circumstances. Clients should consult their qualified tax, legal, and financial professionals before making decisions regarding investments, withdrawals, Roth conversions, estate planning, or insurance products. Investing involves risk, including possible loss of principal. Guarantees, where applicable, are backed by the claims-paying ability of the issuing insurance company.