Leon Mehl

Sequence of returns is the order of your investment returns. It can become a risk when you reach retirement and begin making withdrawals. If you received strong returns during your early working years, you may not have any problems. But poor returns and withdrawals early in retirement can do lasting damage to your portfolio.

To illustrate how sequence of returns risk works, let’s look at a hypothetical example involving two couples who are just entering retirement. We’ll reverse the rate of return sequence for each couple’s investment, and illustrate the impact. 

Both couples begin with a portfolio balance of $500,000 and over 30 years make 5 percent annual withdrawals ($25,000, plus annual increases to account for inflation). Both couples expect the same average annual net return of 6 percent. 

However, Dave and Joan experience poor early returns and strong returns later on, which results in a depleted investment portfolio by year 13, at their mutual age of 78. 

On the other hand, Jeff and Wendy experience positive returns in the early years, and negative returns later, still leaving them with a comfortable portfolio at their mutual age of 78.

Although retreating from the markets would reduce your exposure to sequence of returns risk, it may also lower the growth potential of your portfolio – and lessen its ability to provide you with adequate long-term income.To counteract the risk of poor returns early in your retirement, consider using a portion of your retirement income to purchase a product or products that include principal guarantees, which may be purchased for an additional cost and may be subject to limitations. That way a portion of your assets are protected against declines in periods of poor returns. And you’ll still have the ability to benefit from potential market gains over the long term.