Retirees Can't Afford to Underestimate Sequence of Return Risk
If the market tanks in the early years of your retirement, you could be in big trouble ... unless you're prepared.
You are now subscribed
Your newsletter sign-up was successful
Want to add more newsletters?
Delivered daily
Kiplinger Today
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more delivered daily. Smart money moves start here.
Sent five days a week
Kiplinger A Step Ahead
Get practical help to make better financial decisions in your everyday life, from spending to savings on top deals.
Delivered daily
Kiplinger Closing Bell
Get today's biggest financial and investing headlines delivered to your inbox every day the U.S. stock market is open.
Sent twice a week
Kiplinger Adviser Intel
Financial pros across the country share best practices and fresh tactics to preserve and grow your wealth.
Delivered weekly
Kiplinger Tax Tips
Trim your federal and state tax bills with practical tax-planning and tax-cutting strategies.
Sent twice a week
Kiplinger Retirement Tips
Your twice-a-week guide to planning and enjoying a financially secure and richly rewarding retirement
Sent bimonthly.
Kiplinger Adviser Angle
Insights for advisers, wealth managers and other financial professionals.
Sent twice a week
Kiplinger Investing Weekly
Your twice-a-week roundup of promising stocks, funds, companies and industries you should consider, ones you should avoid, and why.
Sent weekly for six weeks
Kiplinger Invest for Retirement
Your step-by-step six-part series on how to invest for retirement, from devising a successful strategy to exactly which investments to choose.
Sequence of return risk, in my opinion, may be the biggest risk retirees face.
So, what is sequence of returns? It's the order in which you get the returns that your investments receive. Why is this so important? Before retirement, it doesn't matter what order your returns come in. The end result is the exact same number. But look at what happens when I take withdrawals from the accounts in the example below:
| Year | Fund A returns | Fund B returns |
|---|---|---|
| 1 | (-30%) | 25% |
| 2 | 5% | 12% |
| 3 | 12% | 5% |
| 4 | 25% | (-30%) |
Assuming I started with $1 million in each fund and a withdrawal of $60,000 per year, at the end of four years this is what my accounts would look like.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
| Fund A | Fund B |
|---|---|
| $720,000 | $831,768 |
The accounts both earned the exact same rates of return, and yet there is a $111,768 difference between them in only four years! Imagine going out 10 or 20 years.
You can see why I feel sequence of returns risk is one of the most important risks you face, and nobody even talks about it. I don't care nearly as much what return you get on your money in retirement; I care about the way you get it. A portfolio with a lower return can clearly leave you with more money if it is structured properly. This is the heart of income planning for retirees.
What You DON’T Want to Do
To put it simply, you do not want to lose money in your early retirement years. Losing money in the beginning of your retirement, when you are withdrawing money from your retirement plans, has the opposite effect of compound interest. Every withdrawal is compounded by the fact that the market is going down, causing you to spend down your retirement savings faster.
The reason advisers tell you to be more conservative in retirement is because you can't afford to lose money in the early years of retirement, or you might run out of money. In reality, however, this might be bad advice. Being very conservative when interest rates were 11% or when retirees lived to age 70 worked. Today, interest rates are not high enough to sustain most retirees, and many of them are living 30+ years in retirement.
An Easy Way to Avoid this Critical Risk
So, what is the solution? You need to mitigate sequence of return risk.
So how do we mitigate sequence of returns risk? One of the easiest ways is to remove money that you intend on spending in the first few years of retirement out of the stock market. If you don’t withdraw funds invested in the stock market when the market is down, then you avoid the negative compound interest effect in a declining market.
For those who are already retired, I like to keep five years or more of income safe from market declines. If you are still working, the number of years you plan on working until you retire can count toward the five years, since you may not start withdrawing until you actually retire. So, for example, if you are retiring in three years, then you need two years of retirement income out of the market.
For more conservative clients, you can keep up to 10 years of income protected. I wouldn’t suggest going beyond 10 years, though, because you want markets to help your portfolio over the long term. Keeping too much money out hinders the ability of the markets to help you.
If you can minimize the impact of early down-market years, you may greatly improve your chances of not outliving your savings. You may possibly even withdraw a larger percentage of your assets each year than what would normally be recommended. If it is done properly, you should also be able to increase your income with inflation.
Increasing retirement account withdrawal amounts, increasing withdrawals with inflation, and ensuring that your savings last as long as you do are the ultimate goals of retirement income planning.
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Reich Asset Management, LLC is not affiliated with Kestra IS or Kestra AS. The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax adviser with regard to your individual situation.
-
How Much It Costs to Host a Super Bowl Party in 2026Hosting a Super Bowl party in 2026 could cost you. Here's a breakdown of food, drink and entertainment costs — plus ways to save.
-
3 Reasons to Use a 5-Year CD As You Approach RetirementA five-year CD can help you reach other milestones as you approach retirement.
-
Your Adult Kids Are Doing Fine. Is It Time To Spend Some of Their Inheritance?If your kids are successful, do they need an inheritance? Ask yourself these four questions before passing down another dollar.
-
The 4 Estate Planning Documents Every High-Net-Worth Family Needs (Not Just a Will)The key to successful estate planning for HNW families isn't just drafting these four documents, but ensuring they're current and immediately accessible.
-
Love and Legacy: What Couples Rarely Talk About (But Should)Couples who talk openly about finances, including estate planning, are more likely to head into retirement joyfully. How can you get the conversation going?
-
How to Add a Pet Trust to Your Estate Plan: Don't Leave Your Best Friend to ChanceAdding a pet trust to your estate plan can ensure your pets are properly looked after when you're no longer able to care for them. This is how to go about it.
-
Want to Avoid Leaving Chaos in Your Wake? Don't Leave Behind an Outdated Estate PlanAn outdated or incomplete estate plan could cause confusion for those handling your affairs at a difficult time. This guide highlights what to update and when.
-
I'm a Financial Adviser: This Is Why I Became an Advocate for Fee-Only Financial AdviceCan financial advisers who earn commissions on product sales give clients the best advice? For one professional, changing track was the clear choice.
-
65 or Older? Cut Your Tax Bill Before the Clock Runs OutThanks to the OBBBA, you may be able to trim your tax bill by as much as $14,000. But you'll need to act soon, as not all of the provisions are permanent.
-
I'm a Financial Adviser: This Is the $300,000 Social Security Decision Many People Get WrongDeciding when to claim Social Security is a complex, high-stakes decision that shouldn't be based on fear or simple break-even math.
-
4 Ways Washington Could Put Your Retirement at Risk (and How to Prepare)Legislative changes, such as shifting tax brackets or altering retirement account rules, could affect your nest egg, so it'd be prudent to prepare. Here's how.
