Finances in Retirement - Investments

Understanding Sequence of Returns Risk

by Retirement Tips

Jun 6, 2023

Key Takeaways:

  • How the sequence of returns risk can affect your withdrawal for retirement.
  • Creating a strategy to mitigate the sequence of returns risk
  • How to appropriately plan for negative returns in a market downturn

What is the Sequence of Returns Risk?

Within investing, several forms of risk must be considered, such as interest rate risk or the market volatility of a stock. Still, there is also the risk of diminished investment returns. The order in which they are withdrawn can present a real and significant impact on your retirement savings. This risk is called the “sequence of returns risk,” which can cause savings to run out far before the saver’s need for them does.

Within a retirement portfolio, investments can often provide growth, and other assets provide income. As funds are withdrawn, the ideal scenario is that the growth portion of a diversified portfolio will keep up with the withdrawals and replenish those funds.

If there is a prolonged downturn in those investments providing growth during the early years of retirement, sometimes referred to as the fragile decade, and could result in the funds being extinguished faster. With the lower values of the assets funding the investment portfolio, there is a need to sell more of those investments to meet retirement income needs.

When more growth investments are sold, fewer assets can generate returns in the future to offset withdrawals. When this happens early in retirement, it has a more profound impact on the overall value of the retirement portfolio and its ability to maintain sufficient funding for ongoing withdrawals in the future.

This sequence risk is a risk that investors may face in negative portfolio returns towards the end of their careers or early retirement. This is a significant concern as retirees have limited time to recover from losses, which are made even worse by the simultaneous withdrawal of income distributions. Understanding this risk and preparing accordingly is crucial to ensure a secure financial future.

Now let’s look at two scenarios of the impact of return risk.

Examples of Sequence of Returns Risk

Sequence of returns example, returns risk

In this example, both portfolios had the same starting principal ($1,000,000) and an average return of 6% annual return that grows to the same value ($4,288,197) after 25 years. However, they experience their annual returns in inverse order from each other.

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Distributions with Sequence of Returns

Portfolio A begins taking withdrawals during an upmarket, giving it the optimal environment to maintain its portfolio value long-term.

Distributions with Sequence of returns example, returns risk

Portfolio B starts taking annual withdrawals in a down market and depletes the entire portfolio before age 83.

The Impact of RMDs (Required Minimum Distributions) on the Sequence of Returns

Hand of businessman, RMDs, Required Minimum Distributions, retirement planning

Not forgetting about your RMD – this mandatory annual withdrawal investors must make from their retirement account is essential. The amount is calculated based on your age and account balance, and not taking it could result in IRS penalties. RMD applies to account holders who are 73 or older and have a traditional IRA, SEP IRA, SIMPLE IRA, or employer-sponsored retirement plan such as a 401(k). You are not required to take RMD if you have a Roth IRA.

Therefore, knowing how and when to take distributions to mitigate sequence risk is essential since you will likely have to withdraw your retirement accounts.

Managing Sequence of Returns Risk in Your Retirement

Reviewing a financial reports in returning on investment analysis, mitigating risk, sequence risk, returns risk

What can an investor saving for retirement do to reduce the risk of this scenario?

Diversify Your Investment Portfolio

Mitigate the sequence of returns risk by diversifying your investments. Investing in a range of assets can minimize the effects of market volatility on your portfolio. Avoid putting all your eggs in one basket and reduce your exposure to the stock market over time.

Consider a phased retirement approach. By gradually adjusting your investments over time, you can protect yourself from the sequence of returns risk. This approach recommends you lower your exposure to the stock market by reducing the percentage of stocks in your portfolio with each passing year.

Use a retirement bucket strategy. A bucket strategy involves dividing your portfolio into different “buckets” of investments, each designed for a specific goal and to provide a different type of return. This simple approach divides your retirement income into short-term, mid-term, and long-term needs. Keeping these buckets filled appropriately ensures that your income needs are always met, regardless of market volatility. This can help you avoid selling at losses should you need access to funds.

Spend Conservatively And Cut Expenses

Another mitigating strategy would be to cut back on expenses, postpone large expenditures and avoid selling off investments impacted by a correction or bear market. Even a rebounding market will not compensate for withdraws in the early retirement years during a downturn.

Work With a Financial Advisor

A financial advisor can help you understand the sequence of returns risk and develop a strategy to manage it. Understanding your finances can help you create a sound retirement plan to protect your portfolio value while taking distributions and ongoing withdrawals.

Mitigating Sequence Risk with a Certified Financial Planner

Certified financial planner explaining paperwork to elderly retired couple front of desk,

Retirement planning can be a baffling task in today’s era, with the plethora of financial products and services available at our fingertips. The good news is, having a fiduciary financial advisor working by your side can make all the difference in protecting your nest egg and achieving your retirement goals and long-term returns.

In the age of automation, most large investment companies barely offer personalized guidance for individuals; hence, having a go-to advisor to answer your queries, communicate with investment companies (resulting in potential money-saving and access to unique products), and align your investment objectives to your retirement goals can help give you peace of mind.

Financial advisors often help retirees build sufficient retirement savings, create a withdrawal strategy, and estimate a retirement date that assures that the savings will last for as long as the retiree needs the funds.

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Rob Berger/Benjamin Curry, “How To Understand Sequence of Returns Risk,” (2021, July 6),, Advisor, Retirement

“Timing Matters: Understanding Sequence of Returns Risk,” (2022, April 7), Charles Schwab, Retirement Income


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Retirement Tips

Retirement Tips is an educational blog dedicated to helping workers and retirees become more knowledgeable about retirement and financial planning.

We want to help readers learn more about their retirement investing options, programs like Medicare and Social Security, and difficult-but-important topics like long-term care and estate planning.

Our goal is to help you make more informed decisions when it comes to your retirement and to make it easier for you to connect with an advisor in your area should you need professional financial advice.

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