By Brett Gottlieb
You’ve spent years diligently saving, and it’s natural to feel a sense of accomplishment as you watch your account balances grow. Yet for many, the actual transition into retirement brings a subtle shift in perspective. You might find yourself realizing that a large number on a screen feels very different from a reliable paycheck that lasts for life. This uncertainty often stems from a hidden factor that doesn’t show up on a standard brokerage statement—sequence-of-returns risk.
The fear of a market dip occurring just as you begin to withdraw funds is a weight many retirees carry, as the timing of those early losses could significantly impact how long your portfolio lasts. While this risk might feel invisible, ignoring it may lead to unnecessary stress during what should be your most rewarding years.
Gaining a clearer understanding of how sequence of returns works could be the key to helping your hard-earned money support the lifestyle you’ve envisioned.
What Is Sequence-of-Returns Risk?
When you’re working or actively contributing to your retirement fund, market fluctuations may not have a long-term effect on your finances as long as the average return is solid and your portfolio grows in value.
After you retire and start taking distributions from your fund, however, sequence-of-returns risk can become an issue. It’s all about the order of your investment gains and losses after you retire. If the market faces a downturn in the initial months of your retirement, you might experience drastic losses that could drop your balance quickly.
An Example of Sequence-of-Returns Risk
To illustrate how the sequence of returns can affect your investments, let’s look at a hypothetical retiree. They have $500,000 in their retirement fund and withdraw $25,000 every year in retirement.
Now, consider the following two scenarios, each spanning 10 years:
- Scenario 1: The market enjoys positive gains in the early years of retirement but generates losses in later years.
- Scenario 2: The market starts out with steep losses and suboptimal returns but rebounds in later years.
In both scenarios, the average return over 10 years is the same: 3%.
| Scenario 1 | ||||
| Year | Account Balance | Return | Distribution | Final Balance in Account |
| 1 | 500,000 | 10% | 25,000 | $ 525,000.00 |
| 2 | $ 525,000.00 | 15% | 25,000 | $ 578,750.00 |
| 3 | $ 578,750.00 | 5% | 25,000 | $ 582,687.50 |
| 4 | $ 582,687.50 | 10% | 25,000 | $ 615,956.25 |
| 5 | $ 615,956.25 | 10% | 25,000 | $ 652,551.88 |
| 6 | $ 652,551.88 | 15% | 25,000 | $ 725,434.66 |
| 7 | $ 725,434.66 | -5% | 25,000 | $ 664,162.92 |
| 8 | $ 664,162.92 | -15% | 25,000 | $ 539,538.48 |
| 9 | $ 539,538.48 | -5% | 25,000 | $ 487,561.56 |
| 10 | $ 487,561.56 | -10% | 25,000 | $ 413,805.40 |
| Avg Return | 3% | |||
| Scenario 2 | ||||
| Year | Account Balance | Return | DDistribution | Final Balance in Account |
| 1 | 500,000 | -10% | 25,000 | $ 425,000.00 |
| 2 | $ 425,000.00 | -5% | 25,000 | $ 378,750.00 |
| 3 | $ 378,750.00 | -15% | 25,000 | $ 296,937.50 |
| 4 | $ 296,937.50 | -5% | 25,000 | $ 257,090.63 |
| 5 | $ 257,090.63 | 15% | 25,000 | $ 270,654.22 |
| 6 | $ 270,654.22 | 10% | 25,000 | $ 272,719.64 |
| 7 | $ 272,719.64 | 10% | 25,000 | $ 274,991.60 |
| 8 | $ 274,991.60 | 5% | 25,000 | $ 263,741.18 |
| 9 | $ 263,741.18 | 15% | 25,000 | $ 278,302.36 |
| 10 | $ 278,302.36 | 10% | 25,000 | $ 281,132.60 |
| Avg Return | 3% | |||
Although they have the same average return over the course of a decade, the ending balance at year 10 in Scenario 1 is $413,805.40. Even with the gradual improvement in returns, the account balance after 10 years in Scenario 2 is $281,132.60—a stunning $132,672.80 less than Scenario 1.
Steps to Lessen the Impact of Sequence-of-Returns Risk
The most sensible way to reduce the impact of sequence-of-returns risk is to start taking withdrawals on your retirement when the market is going up. However, if you’ve already experienced a market loss due to sequence-of-returns risk, there are options for mitigating long-term risk.
Reserve Cash for Emergencies
Keep one or two years’ worth of living expenses in your cash reserves, separate from your retirement fund, to avoid withdrawing cash in a downturn. Stash your emergency fund in a cash or low-volatility brokerage account.
Have Some Flexibility With Withdrawals
Scale back on your withdrawals and spending when the market is down. You can also pause adjustments for inflation if needed.
Consider an Annuity
An annuity is a steady income source that can safeguard you from the effects of market losses. It can also keep you from outliving your savings.
Prioritizing Your Strategy for Sequence-of-Returns Risk
At Comprehensive Advisor, our focus goes beyond simply looking at immediate performance. When we connect with clients, we aim to bring your unique needs and resources into a healthy balance to support sustainable, long-term growth.
Because the timing of market fluctuations can have a significant impact on your portfolio’s longevity, we prioritize strategies that help manage sequence-of-returns risk. Our goal is to help you build a plan that remains resilient, no matter what the market may be doing when you decide to transition into retirement.
To get in touch, email us at info@ComprehensiveAdvisor.com or call (760) 813-2125. We look forward to speaking with you!
About Our Advisors
With nearly two decades of industry experience, Brett Gottlieb, and the team at Comprehensive Advisor provide personalized retirement planning and investment services. They help clients sift through the sea of investment options and make sense of what strategies are best suited for your unique needs. Our advisors customize financial strategies centered around “The Retirement Defense” process, a unique way we build your written plan that is designed to help get you to and through retirement by focusing on the key areas of your financial life. Our investment philosophy serves as a road map for helping you navigate the complexities of the financial landscape. By prioritizing capital preservation, emotional resilience, and personalized strategies, we empower you to confidently pursue your financial goals and adapt to life’s changes.
Investment advisory products and services made available through AE Wealth Management, LLC (AEWM), a Registered Investment Advisor. Insurance products are offered through the insurance business C.A. Financial & Insurance Services. Comprehensive Advisor, LLC is an Investment Advisory practice that offers products and services through AE Wealth Management LLC (AEWM), a Registered Investment Advisor. AEWM does not offer insurance products. The insurance products offered by C.A. Financial & Insurance Services are not subject to investment Advisor requirements. CA Ins. Lic. #6000262.
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