Understanding Sequence-of-Return Risk in Retirement

If you’re retired—or thinking about retiring—congratulations! It’s a major milestone. But if you’re also starting to draw income from your investment portfolio, there’s an important concept you need to understand: sequence-of-return risk. This risk doesn’t get as much attention as others, but it can dramatically impact the sustainability of your retirement income.

Sequence-of-return risk refers to the danger of receiving poor investment returns early in retirement while simultaneously making withdrawals. Even if the average annual return over time is solid, negative returns in the early years—combined with withdrawals—can reduce the overall value of your portfolio much faster than expected. For example, a hypothetical plan to accumulate $1 million over 40 years by saving $300/month at an 8% return sounds great. But markets don’t deliver consistent annual returns—and that variability is where sequence risk enters the picture.

Why the Timing of Returns Matters—Before and After You Retire

Most people think of sequence-of-return risk as something retirees face, but it’s just as important for those approaching retirement. For retirees, poor returns early in retirement can be incredibly damaging. For pre-retirees (also called accumulators), the greatest danger is experiencing poor returns just before they retire. We call this retirement date risk.

The closer you are to retirement—and the more you’re depending on your portfolio—the more serious these risks become. One strategy to manage them is reducing portfolio volatility as you near retirement. However, doing so too early or too aggressively can also mean needing to save more, delay retirement, or spend less once retired. It’s a delicate balance, and tools like Monte Carlo simulations can help guide your strategy.

Planning Ahead: Strategies to Mitigate the Risk

The good news? You can plan for sequence-of-return risk. A few ways to manage it include:

• Reducing withdrawals in down markets (yes, a temporary “pay cut”)

• Taking higher distributions during bull markets (rewarding the good years)

• Maintaining flexibility in your spending strategy

• Diversifying your portfolio to reduce volatility

• Working with a professional team—like Gainplan—to actively manage risk

The most important thing is to have a withdrawal strategy. Without one, you risk depleting your portfolio faster than anticipated. Most retirees have more assets at risk now than ever before, and many are relying on those assets for income. That makes sequence-of-return risk more relevant than ever.

Final Thoughts

Anytime you’re drawing income from a portfolio, sequence-of-return risk is present. But it’s manageable with a well-thought-out plan. The key is understanding the impact of return timing and having strategies in place to adapt. Whether you’re on the edge of retirement or already living it, working with an experienced team and being proactive can make a world of difference.

Let your retirement plan be as intentional as your career was. Your future self will thank you.

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