What Is Sequence of Returns Risk And Why Is It Such A Big Retirement Concern?
This retirement risk has several name variations. But whether it’s called sequence of returns risk, order of returns risk, or any of its other names, this is one risk that you really need to understand and be fully prepared for.
Are your retirement savings in accounts that are subject to market losses? If so, the date that you choose to retire on could drastically reduce how long your nest egg lasts.
Today’s article will help you answer two questions:
What is sequence of returns risk?
How do I avoid sequence of returns risk in my retirement plan?
By the way, if you’re concerned about running out of money in retirement and want a solution to this problem, then be sure to watch this free video.
What is sequence of returns risk?
You’ll encounter many risks while saving for retirement, including market risk, tax risk, and inflation risk. However, there is another risk that is often not talked about, and that is sequence of returns risk. This is when your portfolio is subject to market losses during the “red zone”. The red zone refers to the years just before and right after you start retirement. It’s really important that you avoid losses during this time!
It’s important to note that not every certified financial planner will help to reduce and eliminate each of the retirement risks that we’re discussing, so be sure to speak to a financial professional who will.
Part of retirement planning is making sure that your investment portfolio avoids too many years of negative returns. This is especially true at retirement age, as your investment returns can have a significant impact on your overall portfolio value and retirement assets. There are many investment strategies to consider, and it’s important to align your investment strategy with your investment objectives. This might include fixed income investments, creating lifetime income streams to generate income that you’ll need, or other options to avoid the sequence risk that we’ve discussed.
Tip: You can learn more about the top 10 retirement planning risks and how to avoid them here.
If your savings were to go down just before or right after you start retirement, and you proceed to take withdrawals, then this combination could quickly reduce your available funds. So, the date that you choose to retire on, along with the timing of your withdrawals, could have a huge impact on how long your future retirement income will last.
Sequence of returns risk can be a difficult one to understand at first. But, I’ve found that a quick visual example can help a lot.
The numbers below compare two investors who start taking withdrawals at retirement. All of their details are exactly the same, apart from the sequence of returns (the order in which their stock market returns happen). It shows that Investor A runs out of money at age 79, while Investor B still has over $877,000 at the same age!
By the way, if you’d like to grow your wealth with ZERO stock market risk, then watch this free video today.
How do I manage sequence of returns risk?
Managing this risk is partly down to luck and just hoping that the stock market isn’t down during your red zone years. However, you can definitely do your part as well by having a plan in case that does happen. (Read more about how to avoid market risk.)
There are several options and strategies for protecting yourself against this big retirement risk. Here are some of those for you to consider:
If the stock market is down when you plan to retire, then consider working for a little longer instead of taking withdrawals.
You can still save and invest after you retire, which will allow your assets to continue growing.
Always consider diversification in your retirement portfolio. Include safer investment options to reduce volatility, especially around your red zone years.
Try not to overspend in your early retirement years, by being a little more conservative to start with.
Make sure that you do have some funds that are not at risk, so you can access the money from these accounts if your other investments are down.
I hope this article has helped explain what sequence of returns risk is, and how you can manage this in your own retirement plan. If you’d like to discuss this in more detail with a financial professional, then you can schedule a free retirement consultation today.
