Sequence of Return Risk
What if I told you that the order in which your investment returns occurred could have a major impact on your retirement? In this week’s blog, our team will dive into one of the most overlooked potential risks to retirement planning, as well as three strategies that you might be able to implement to combat it.
Sequence of return risk is the risk that the order in which you experience investment returns through the course of retirement could potentially negatively impact your plan. Let’s briefly go through an example.
We have two retirees: Investor A and Investor B. They both achieve the same overall rate of return overtime and start with the same amount of money, in this instance, $600,000 each. In addition, they both withdraw $25,000 per year for five years.
Here is Investor A’s rate of return, where he starts during a bull market:
Year 1: 18.75% Year 2: 14.90% Year 3: -8.5% Year 4: -12.75% Year 5: -20.30%
Here is Investor B’s rate of return, where he starts during a bear market:
Year 1: -20.30% Year 2: -12.75% Year 3: -8.50% Year 4: 14.90% Year 5: 18.75%
For those who don’t know, a bull market is where returns are positive over the course of time, as opposed to a bear market where the rate of return is negative over the course of time.
So, Investor A starts off with positive returns and then moves toward negative returns, while Investor B starts off with negative returns and turns toward positive returns the exact opposite of Investor A.
Even with a substantial loss in year five, because of the early gains that Investor A experienced, after those five years he finishes with $424,401.04. Whereas in Investor B’s situation, starting off with negative returns, he finishes with $373,652.49. That may not seem like a big difference, but it’s $50,748.55 less than investor A has left after just 5 years.
*Disclaimer: These values were calculated using the previously mentioned annual return values with each account starting at $600,000. Once the value was calculated at the end of each year an additional $25,000 was deducted from the annual ending value and that number was used in the calculation for the next year.
Now that we’ve seen an example of the type of impact that sequence of returns can have on a portfolio, let’s talk about some of the strategies that might help mitigate these risks.
领英推荐
Develop a Plan:
Developing a plan for your retirement that is simplified and streamlined can help you, remain focused and minimize risks that you might face. Our philosophy at Rockline is to keep our planning simple and streamlined, which can be especially helpful when working through moments of life that could bring on stress.
Diversify Your Investments:
Having your funds strategically placed across different investments could potentially combat sequence of returns risk. Diversification may allow for a smoother ride and help you withstand volatility over your investment journey.
Preparation:
Having your plan in place and adjusting as your life evolves is crucial. Having conversations with your trusted professionals routinely is fundamental. Developing a solid understanding of your investment goals and having potential fallback plans if you do experience a bear market at an inopportune time in your journey can help avoid rash decisions that could cost you in the long run.
The Final Word
We hope you found this helpful, and we’d be happy to have a conversation with you. Feel free to visit us at www.rocklinewealth.com for more insights on retirement strategies, and how we can help you reach your financial goals.
Disclaimer:
Rockline Wealth Management (RWM) is a registered investment adviser located in Plainview, NY. RWM is registered with the U.S. Securities and Exchange Commission. Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission.
Rockline Wealth Management does not offer tax or legal services. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation.
All investment strategies have the potential for profit or loss. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client's investment portfolio. Asset allocation and diversification do not ensure or guarantee better performance and cannot eliminate the risk of investment losses.
The opinions expressed and material provided are for general information, and should not be considered a solicitation of financial advice or for the purchase or sale of any security.
Real-life and fictional examples given in this video should not be viewed as guaranteed outcomes when investing. Past performance is not indicative of future results and every individual’s investment circumstances are different. Individuals should consult their financial professional before implementing their investment plan.