5 Actual Mistakes Retirees Need to Avoid
2.Ignoring Sequence of Return Risk
You’ve probably heard the phrase “sequence of return risk,” but if you haven’t, don’t worry—you’re not alone. It’s one of the most important but least understood risks retirees face. Sequence of return risk is the risk that the timing of withdrawals from your retirement account will negatively affect your portfolio. But what does that really mean?
LET’S BREAK IT DOWN WITH AN EXAMPLE:
Mr. Jones and Mrs. Smith both retire with $500,000 and plan to withdraw $25,000 annually to live on. Over the next 25 years, they both average the exact same return— let’s say 8% annually. But here’s where the difference comes in: Mr. Jones has two terrible market years right after he retires, while Mrs. Smith enjoys two fantastic market years. Even though they average the same return over 25 years, by the time they hit year 15, Mr. Jones is completely out of money. Meanwhile, Mrs. Smith still has more than $1.8 million. How is that possible? It’s all about timing. Those first two negative years compounded Mr. Jones’s withdrawals, eating away at his principal faster than he could recover.
This is why sequence of return risk is so important. When you start withdrawing from your portfolio, especially during down markets, you’re locking in those losses. If your first few years of retirement coincide with a market downturn, your entire retirement could be in jeopardy unless you’ve planned for it. THE TAKEAWAY? Don’t leave your withdrawals to chance. Working with a financial advisor to create a withdrawal strategy that accounts for market volatility is essential for preserving your wealth in retirement.
MR. JONES
MRS. SMITH
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