Sequence-of-Return Risk

Sequence-Of-Return Risk

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“My husband and I plan to retire in a few months. We are worried that the stock market will correct just when we start taking money out of our accounts. Are we just being worry warts?

Not at all. What you are worried about is called the “sequence-of-return risk” and it is a real problem for many retirees. When retirees take money out of their accounts, the sequence of positive and negative annual returns can dramatically impact how long a portfolio will last. Let’s take a look at two hypothetical retirees.

  Retiree #1Retiree #2
YearAnnual WithdrawalReturnBalance
1,000,000
Return Balance
1,000,000
150,000-17%780,00015%1,100,000
251,500-15%611,5005%1,103,500
353,045-9%503,42019%1,260,120
454,63616%529,33115%1,394,502
556,27510%525,98917%1,575,292
657,96412%531,1449%1,659,105
759,7037%508,6218%1,732,130
861,494-5%421,696-1%1,653,315
963,3997%387,81618%1,887,512
1065,23919%396,2629%1,992,149
1167,1969%364,72919%2,303,462
1269,21218%361,1697%2,395,492
1371,288-1%286,269-5%2,204,430
1473,4278%235,7437%2,285,313
1575,6299%181,33112%2,483,921
1677,8987%116,12710%2,654,415
1780,23515%53,31116%2,998,887
1882,64219%0-9%2,646,345
1985,1225%0-15%2,164,271
2087,67515%0-17%1,708,670

In this scenario, each retiree starts with a $1,000,000 portfolio and withdraws 50,000 at the end of the first year. The annual withdrawal grows each year based on 3.00% inflation. The annual returns on the balance of the two accounts is the same, but the sequence occurs in reverse order. You will note that the first retiree’s account falls to zero in year 18, while the second retiree has over $2,600,000 in year 18.

At Goepper Burkhardt we show our clients how they can moderate the sequence of return risk.

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