Sequence-of-Returns Risk

What is Sequence of Returns Risk

Sequence of returns risk refers to the impact that the timing of market gains and losses can have on your retirement income.

When you are working and saving, market ups and downs have less effect because you are not withdrawing money. However, once you begin taking income from your portfolio, market declines can have a much greater impact.

If negative market returns occur early in retirement while withdrawals are being made, your portfolio may be reduced more quickly and may not fully recover—even if markets perform well later.

In other words, it is not only how much your investments earn over time that matters, but when those returns occur.

Why this Matters in Retirement

• Early market losses combined with withdrawals can permanently reduce the value of your portfolio

• Recovering from losses becomes more difficult when assets are being withdrawn

• This can increase the risk of running out of money later in retirement

Case Study: Sequence of Returns Risk at Retirement

Two investors, John and David, retire at age 60 with:

• $100,000 invested in a diversified portfolio

• Same annual withdrawal amount

• The same long-term average rate of return
  
  

The only difference between them is the order in which market returns occur during the early years of retirement.