Part of: Retirement Income Planning
Sequence of Returns Risk in Retirement
Sequence of returns risk refers to the possibility that the order in which investment returns occur — not just their average — can affect how long retirement savings last, particularly when withdrawals begin early in a period of poor returns.
Why order matters, not just average returns
Two portfolios with the same average annual return over 20 years can produce very different outcomes if withdrawals are being taken, depending on whether the poor-return years happen early or late in that period. Withdrawing from a portfolio during a downturn can lock in losses in a way that doesn't happen when a portfolio isn't being drawn down.
Approaches sometimes discussed
Some approaches discussed in this context include maintaining a cash or short-term reserve to draw from during downturns, adjusting withdrawal amounts based on market conditions, or maintaining a diversified mix intended to manage volatility. [PERFORMANCE CONTENT — DO NOT PUBLISH: no specific return figures, backtests, or performance claims may be added to this section.] None of these approaches eliminates the underlying risk, and no strategy can guarantee a particular outcome.
Key takeaways
- The order of investment returns, not just the average, can affect how long retirement savings last.
- This risk is generally most pronounced in the years immediately before and after retirement begins.
- No approach eliminates this risk entirely or guarantees an outcome.
More in this series
- Retirement Income Planning: A Framework for Coordinating Your Income Sources
- Required Minimum Distributions: What to Know