Sequence of Returns

Dec 17, 2022 | Problems | 0 comments

Sequence of Return Risk is a simple concept to understand, but it is not often talked about.    And it’s a serious risk in retirement that can be easily avoided.

Simply speaking, the risk is the impact of a significant downturn in one’s retirement assets in the first half of retirement.   The assets from which you are withdrawing an income from.

During the accumulation phase of your life when markets have a major pull back you have time to recover.    In fact you can actually invest more.    And this holds true if your retirement income comes any type of investment … stocks, bonds, real estate.   You are not dependant on selling your investment to live on.   You are not in the situation where you can no longer refinance a property because the value has decreased.

Sequence risk comes into play once you start withdrawing an income.  In the accumulation years lower prices allow you to buy more.  But the opposite happens in retirement … you are forced to sell more of your assets for the same income.

You require your assets to live.   You will be forced to sell those assets for income.    The returns you earn in the early years of retirement are crucial.  Above-average returns can allow savings to last longer, but below average returns are hard to recover from.  Savings are depleted sooner.  The result your money might not last as long as planned.

Take a look at these 3 charts below.   We show that an average return of 14.84% in theory still had a balance of $15M after 30 years.  But in actuality, using real S&P 500 returns, you run out of money by year 14.

We build a better plan that creates a world where you are not forced to sell assets to live on when they are down.   We build redundancy into the plan allowing you to create a higher and longer income stream.     It is a mistake to believe you no longer require assets once you are no longer working.   Once you retire your income is from your assets.   And those assets need to be insured in order to reduce sequence of return risk.

Chart 1. 30 years of retirement.  Start with $1Million.   Withdraw $100,000 a year.  Earn 14.84% each year.   At the end of 30 years you still have $15M.

Chart 2.   30 year history of the S&P 500 from 1970 to 1984.   Average rate of return 14.84%.

Chart 3.   30 years of retirement.  Start with $1Million.   Withdraw $100,000 a year.  Shown against actual S&P 500.   You’ve run out of my by year 14.

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