Sequence Of Returns Risk

Sequence Of Returns Risk Can Make Or Break Your Retirement

All investors face market risk, which concerns how market volatility causes investment returns to vary over time in comparison to long-term average returns.

However, retiree investors are confronted with an additional phenomenon known as Sequence Of Returns Risk - retiring before a bear market begins or during the early stages of a bear market.

The specific sequence of investment returns matters significantly during the early years of the withdrawal phase of retirement, when the impact of drawdowns (losses) is especially magnified.

Investment losses, coupled with retirement income withdrawals, can deplete your wealth rapidly.

How Long Will Your Retirement Income Last?

Millions of retirees' investment and retirement income portfolios were devastated by Sequence Of Returns Risk when they retired before or during the early stages of the 2000-2002 bear market and the 2007-2009 bear market, causing their retirement income and lifestyle plans to implode.

Their portfolios experienced significant losses early on in retirement - and the shrinking account balances impacted how much income their portfolios could generate moving forward.

They were confronted with the dilemma of:

(1) taking on riskier investments with the hope (potential) of earning higher returns to make up for their portfolio value shortfalls,

(2) lowering their expenses and significantly downsizing their retirement income and lifestyle, and/or

(3) going back to work.

The Order Of Your Investment Returns Can Make A Dramatic Difference In Your Retirement Income

During the Accumulation Growth Phase Of Investing, many investors' goals based plans focus on building their retirement nest egg to a certain amount by a target certain date.

As they transition to retirement and the Distribution Phase Of Investing, their goals based plans shift and focus on how their retirement nest egg can support a desired retirement income and lifestyle - and not outlive their money.

When it comes to investing during retirement, many people only think of what "Average Return" is needed on their retirement nest egg to support a sustainable retirement income and lifestyle.

However, Sequence Of Returns Risk is a harsh reminder that average long-term returns are not always your friend. What might be more important is not the average return, but the "Sequence (Order) Of Returns".

Jill and Jack Hypothetical Investment Scenarios

Consider the following hypothetical investment scenarios for Jill and Jack, that gives a great visual of what a difference a couple bad years early on during retirement can make, and to help explain why it is so important to diversify income streams for retirement.

Jill and Jack each worked hard to accumulate their $1,500,000 nest eggs, retired at age 67, and invested in the S&P 500 Price Index. *

Jill was able to withdraw $2,313,183 by age 93 (26 years), and her investment and retirement income portfolio still had a remaining account value of $582,841.

[Note: Jill's total retirement income withdrawals of $2,313,183 + $582,841 ending account value = $2,896,023.]

Jack was only able to withdraw $1,367,206 by age 85 (18 years), when his investment and retirement income portfolio ran out of money.

[Note: Jack's total retirement income withdrawals of $1,367,206 + $0 ending account value = $1,367,206.]

That's a retirement income and retirement portfolio value difference of $1,528,817 [$2,896,023 - $1,367,206]... for two people who retired at the exact same age... with the exact same account value.

The difference - Jill's portfolio experienced the good luck of retiring before a strong up market... and Jack's portfolio experienced the bad luck of retiring before a bear market.

The sequence of investment returns, when coupled with retirement income distributions, resulted in a significantly worse outcome for Jack’s investment and retirement income lifestyle than Jill's.

* The S&P 500 Price Index is an unmanaged index consisting of 500 primarily large-capitalization stocks. It is not possible to invest in an index. Taxes, fees and expenses were not factored into this example. Annual retirement income withdrawals adjusted by 3% inflation. These hypothetical examples are for illustrative purposes only and are not intended to represent the performance of any particular investment product.

Past performance is no guarantee of future results.

Buffered Investments And Risk Free Alternatives Can Help Reduce Sequence Of Returns Risk

Sequence Of Returns risk during your early retirement years can wreak havoc with you, not only financially, but emotionally.

If your entire investment and retirement income portfolio is left to depend solely on the stock and bond markets, then its value (and your retirement income and lifestyle) is completely at the mercy of extreme market conditions.

Could you (Would you) willingly live through another 2000-2002 or 2007-2009 type bear market all over again, and remain comfortably invested, as you watch your hard-earned portfolio evaporate by 30%, 40% or more of the assets that you had planned for, and counted on, to fund your retirement income and lifestyle needs?

Is Your Investment And Retirement Income Portfolio Prepared For Sequence Of Returns Risk?

An effective way to help reduce Sequence Of Returns Risk and Longevity Risk (the risk of outliving your money) is to diversity your investment and retirement income portfolio into different asset classes.

Buffered ETFs, Buffered Annuities, and risk free alternatives such as Multi-Year Guarantee Annuities, Fixed Index Annuities, Immediate Income Annuities, Deferred Income Annuities and QLACs, and the different protections and guarantees they each provide, act as an asset class that may help you manage Sequence Of Returns Risk and the risk of outliving your retirement savings.

They can produce a potentially more attractive range of investment returns with lower volatility and can be implemented as part of your overall portfolio asset allocation diversification.

Sequence Of Returns Risk

Sequence Of Returns Risk Can Make Or Break Your Retirement

The Order Of Your Investment Returns Can Make A Dramatic Difference In Your Retirement Income

Buffered Investments And Risk Free Alternatives Can Help Reduce Sequence Of Returns Risk

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