Can two retirees earn the same average return but have different outcomes?

Yes. Two retirees can earn the same average annual return but have very different outcomes when one experiences losses early in retirement and the other experiences losses later. Early losses can force retirees to sell investments at lower values to fund withdrawals, leaving fewer assets invested for a later market recovery.

What is the retirement risk zone?

The retirement risk zone is the period leading up to retirement and the first years after retirement, when market losses can have an outsized effect on a long-term income plan. Losses shortly before retirement can reduce accumulated savings, while losses after withdrawals begin can increase sequence-of-returns risk. The term does not have one fixed time frame, though retirement research often focuses on the years surrounding retirement.

How can retirees manage sequence-of-returns risk?

Retirees may reduce sequence risk with diversified investments, a withdrawal plan that can adapt to market conditions, and a reserve of cash or high-quality short-term investments for near-term spending. Regular rebalancing can help maintain the intended asset allocation. Flexible spending, such as reducing discretionary expenses or delaying inflation adjustments after major losses, may also reduce pressure to sell investments during a decline. A financial professional can stress-test an income plan against poor early-return scenarios.

What Is Sequence of Returns Risk? How It Threatens Your Retirement

Q: What is sequence-of-returns risk?

Sequence-of-returns risk is the risk that poor market returns early in retirement, combined with ongoing withdrawals, reduce a portfolio’s value and make an income plan harder to sustain. The order of returns can affect how long retirement assets last, even when two investors experience the same average return over time.

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What Is Sequence of Returns Risk? How It Threatens Your Retirement | Dunham