sequence of returns risk in retirement

Moshe Milevsky and the Sequence of Returns – A Lesson in Reverse Dollar Cost Averaging

In retirement, the rate of return is far less important than the timing, or sequence, of returns. Timing is everything, and here’s why.

When saving and investing, market ups and downs are to be expected. For ‘buy and hold’ investors, systematically buying into the market over time averages your position in a stock and you come out ahead over time. You pick up extra gains from the good buys, and most likely have just average returns on the ‘top of market’ buys. But overall, you come out just fine because your lower basis purchases are averaged with higher basis purchases.

But when systematically withdrawing your assets, the effect is the exact opposite. Systematically selling sells stocks captures extra losses in down markets, but once sold, you have no chance to rebound. A bad year combined with regular withdrawals can equal portfolio ruin in just a few short years.

Sequence of Returns Risk Explained

The risk of markets and the sequence of returns is also referred to as “Reverse Dollar Cost Averaging.” It’s one of those retirement planning risks that mainstream advisors who focus on stocks and bonds just seem to ignore, but it’s a real threat.

This sequence of returns risk is demonstrated best by retirement expert Moshe Milevsky in his paper “Retirement Ruin And The Sequencing Of Returns” and the data from that paper is illustrated in the graph below.

sequence risk

Portfolio risk is concentrated in the years just before retirement. In the chart above, you can see how losses in the first few years of retirement mean your portfolio is depleted in just 15 years, vs lasting 30 years in more favorable conditions.

The Key Lesson

Portfolio losses early in retirement can have devastating effects on the viability of your portfolio when you are also relying on that portfolio to produce income. When you are carrying market risk and your own longevity risk, you are exponentially increasing the chances of your assets being depleted, and it’s all unnecessary.

Instead, mitigate market and sequence of return risks by investing in a guaranteed income stream. Guaranteed income from annuities supplies you with steady returns and steady income no matter what the markets do. Annuities are made for volatile times and perfectly address the sequence of returns risk problem.

An annuity that provides safety and guarantees is not just a product. It’s a part of your overall financial plan and it helps relieve pressure and risk on other parts of your portfolio.

Think about it-

If you have guaranteed income to cover your essential needs, do you need to worry about market volatility on your remainder assets? Nope- if the market is down, don’t sell- just let it bounce back!

Allocating a portion of your portfolio to the right type of guaranteed annuity releases all kinds of pressures and mitigates many risks. Give us a call to see how it will work in your situation.

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