Most people spend a lot of time thinking about how much they need to earn on their investments in retirement.
What often gets overlooked is when those returns occur.
I’ve had several conversations recently with people approaching retirement who felt confident about their long term return assumptions. Their plans looked solid over a 20 or 30 year period.
The concern wasn't the average return.
It was the timing.
Imagine two retirees with identical portfolios who earn the exact same average return over retirement.
One experiences strong returns early and weaker returns later.
The other experiences market declines during the first few years of retirement and stronger returns later.
Even though the average return is identical, the outcomes can be dramatically different.
Why?
Because withdrawals are happening at the same time.
When a portfolio declines early in retirement, assets may need to be sold at lower values to generate income.Those dollars are no longer available to participate in a future recovery.
This is commonly referred to as sequence of returns risk.
What makes sequence risk challenging is that it often appears right when retirees begin relying on their portfolio for income.
The first several years of retirement can have an outsized impact on long term sustainability.
That's why retirement planning involves much more than projecting an average rate of return.
Fortunately, there are ways to help manage this risk.
Asset allocation plays an important role by balancing growth potential with stability.
Maintaining appropriate cash reserves may provide flexibility during periods of market volatility.
Distribution planning can also help determine which accounts to draw from and when, reducing pressure on investment assets during challenging market environments.
The goal isn't to eliminate risk entirely.
That's rarely possible.
The goal is to build a strategy that can adapt to different market conditions while supporting long term retirement objectives.
For individuals and families, understanding sequence of returns risk can be an important part of retirement planning.
Because retirement success is not determined solely by how much you earn over time.
Sometimes it's also influenced by when those returns occur.
And having a plan for that possibility can make a meaningful difference.Together, we can work to keep you on-track toward your financial goals.
Request a consultation to learn more.
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