Sequence of Returns Risk
What Is Sequence of Returns Risk?
Sequence of returns risk refers to the danger that poor investment returns early in retirement can significantly reduce the sustainability of a retirement portfolio. Even if long-term average returns are strong, early losses can have lasting negative effects when withdrawals are occurring simultaneously.
This risk is particularly important for retirees who rely on investment portfolios for income.
Why It Matters
When markets decline early in retirement, retirees may be forced to sell investments at lower values to fund living expenses. This reduces the portfolio’s ability to recover when markets improve.
Sequence of returns risk can shorten the lifespan of retirement savings.
How Sequence of Returns Risk Works
Consider two retirees with identical average returns.
If one experiences negative market returns early in retirement while withdrawing funds, their portfolio may decline much faster than someone who experiences losses later.
Strategies to reduce this risk may include:
- maintaining cash reserves
- diversifying investments
- adjusting withdrawal amounts during market downturns
Sequence of Returns Risk vs Market Risk
- Market risk refers to general fluctuations in investment value.
- Sequence of returns risk focuses specifically on the timing of returns during retirement withdrawals.
FAQs About Sequence of Returns Risk
Who is most affected by this risk?
Retirees who depend heavily on investment withdrawals.
Does diversification eliminate sequence risk?
Diversification can reduce but not eliminate the risk.
Can withdrawal strategies help manage sequence risk?
Yes. Flexible withdrawals can help protect portfolios.
Related Terms
