“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 #1 | Retiree #2 | ||||
|---|---|---|---|---|---|
| Year | Annual Withdrawal | Return | Balance 1,000,000 | Return | Balance 1,000,000 |
| 1 | 50,000 | -17% | 780,000 | 15% | 1,100,000 |
| 2 | 51,500 | -15% | 611,500 | 5% | 1,103,500 |
| 3 | 53,045 | -9% | 503,420 | 19% | 1,260,120 |
| 4 | 54,636 | 16% | 529,331 | 15% | 1,394,502 |
| 5 | 56,275 | 10% | 525,989 | 17% | 1,575,292 |
| 6 | 57,964 | 12% | 531,144 | 9% | 1,659,105 |
| 7 | 59,703 | 7% | 508,621 | 8% | 1,732,130 |
| 8 | 61,494 | -5% | 421,696 | -1% | 1,653,315 |
| 9 | 63,399 | 7% | 387,816 | 18% | 1,887,512 |
| 10 | 65,239 | 19% | 396,262 | 9% | 1,992,149 |
| 11 | 67,196 | 9% | 364,729 | 19% | 2,303,462 |
| 12 | 69,212 | 18% | 361,169 | 7% | 2,395,492 |
| 13 | 71,288 | -1% | 286,269 | -5% | 2,204,430 |
| 14 | 73,427 | 8% | 235,743 | 7% | 2,285,313 |
| 15 | 75,629 | 9% | 181,331 | 12% | 2,483,921 |
| 16 | 77,898 | 7% | 116,127 | 10% | 2,654,415 |
| 17 | 80,235 | 15% | 53,311 | 16% | 2,998,887 |
| 18 | 82,642 | 19% | 0 | -9% | 2,646,345 |
| 19 | 85,122 | 5% | 0 | -15% | 2,164,271 |
| 20 | 87,675 | 15% | 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.