Sequence of Returns Risk: The Retirement Risk Most Investors Have Never Heard Of

When you are contributing to your retirement accounts, a market downturn can actually be beneficial\u2014you're buying shares on sale. But the moment you retire and start withdrawing funds, the math flips.

What is Sequence Risk?

Sequence of Returns Risk refers to the danger of experiencing negative market returns early in your retirement. If the market drops and you are simultaneously withdrawing money to live on, you are selling shares at depressed prices. This permanently depletes your portfolio's share count, making it incredibly difficult to recover when the market eventually rebounds.

A Tale of Two Retirees

Imagine two retirees who both average a 6% return over 20 years. Retiree A experiences market losses in the first three years, while Retiree B experiences losses in the last three years. Because Retiree A was withdrawing money during the early downturn, their portfolio might run out of money completely, while Retiree B leaves a substantial legacy. The average return was the same, but the sequence changed everything.

Protecting Your Income

This is why income planning is paramount. By building a strategy that relies on stable, guaranteed, or non-correlated assets for your near-term income, you can give your growth-oriented investments the time they need to recover from market volatility.