What’s the trickiest component of a successful retirement plan?
Of the many retirement risks - like inflation and longevity - perhaps the most challenging one to manage is Sequence of Return risk (aka Sequence Risk)
What is it?
Simply put, sequence risk, is the danger of the timing of your withdrawals having a negative impact on the longevity of your assets. Put another way, selling investments to generate income during a bear market is more costly than the same withdrawals in a bull market.
When is it an Issue?
Sequence of returns risk emerges when you begin systematic withdrawals from your investment portfolio to fund an ongoing income need like retirement.
Why is it an Issue?
Your portfolio will most likely be at its peak value at the beginning of retirement as it is the culmination of your life savings. Your investments are therefore at their point of greatest vulnerability, since any loss will be felt on the entire nest egg.
Once withdrawals begin, the order of your returns from year to year (whether positive or negative) matter as much as your average return. Without the proper strategies place, an unkind market in early retirement, could significantly increase the risk of early asset depletion.Read More