Sequence of Returns Risk: The Unseen Threat

Key Takeaways

• Poor market returns just before or after retirement can permanently weaken a portfolio.
• Withdrawal timing matters as much as long-term average returns.
• Protecting part of retirement income from volatility can reduce sequence-of-returns risk.

Sequence-of-returns risk is the danger of experiencing poor market returns early in retirement—just before or soon after you begin taking withdrawals. Even if markets recover later, early losses combined with ongoing withdrawals can permanently shorten how long a portfolio lasts before all funds are depleted.

Two retirees can earn the same average market return over time but experience very different outcomes depending on when good or bad years occur. Losses early on shrink the portfolio right as withdrawals are being taken, making it harder to recover.

This risk is especially important during The Fragile Decade—the five years before and five years after retirement—when portfolios are most vulnerable. Without protection, market downturns during this period can force retirees to reduce spending or take on more investment risk later in life to try to make up for losses with little time to do so.

Managing sequence-of-returns risk often means protecting at least part of your retirement income from market volatility so withdrawals don’t rely entirely on investment performance.

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Disclosures:

This material is provided for educational purposes only and does not constitute investment, legal, tax, or insurance advice. It should not be relied upon as a recommendation to purchase, sell, or exchange any security or insurance product. Investors should consult their financial, tax, and legal professionals before making financial decisions.

Annuities are insurance products issued by insurance companies. Guarantees are subject to the claims paying ability and financial strength of the issuing insurer. Product features, limitations, fees, surrender charges, and availability vary by contract and carrier.