Don’t Let ‘Sequence of Returns’ Risk Ruin Your Plans


You’ve saved diligently throughout your career, invested those savings prudently, and accumulated a nice nest egg. Now that retirement is within sight, you’re set, right?

For most, the answer is yes. But every investor takes some risk that well-laid plans could go awry. Think about someone who retired in March 2000, at the start of the dot-com bubble burst. Or in October 2007, at the start of the Great Recession.

These are examples of what’s called “sequence of returns” or SOR risk — the possibility that a market downturn occurring near your retirement date could affect your retirement plans.


While declines can be nerve-wracking, they’re not that unusual — the S&P 500 fell 33 percent in 1987 and 48 percent between January 1973 and October 1974. Historically, investors who stay the course and don’t sell at a loss have a greater chance of recovering.

Eventually. Those who can’t stay the course — and it happens — may have to sell at inopportune times, depleting the remaining value of their portfolio and limiting the portfolio’s potential to recover.

The good news: You can reduce SOR risk with a well-thought-out plan. What’s right for you will depend on personal factors best discussed with your advisor. Here are three strategies that can serve as a starting point for the conversation.

“De-risk” leading up to retirement: While it may seem counterintuitive, keeping a smaller percentage in stocks during the decade leading up to retirement and the decade after — and increasing that percentage as you age — will help reduce SOR risk. Market declines in the years preceding and following retirement potentially can do the most harm, so that may be a good time to “de-risk” your portfolio with a greater allocation to bonds and cash.

Set a fixed withdrawal amount: Retirees often assume they can withdraw a certain percentage of their total portfolio, increasing that amount every year to account for inflation. Instead, set a fixed amount for your withdrawals in each coming year based on the year-end value of your portfolio. You can establish a “floor” — an amount that can be withdrawn in any market environment to cover your basic needs — and adjust discretionary spending according to your portfolio’s performance.

Create a liability-matching portfolio: It’s possible to practically eliminate SOR risk by determining how much you need in retirement and creating a portfolio of fixed-income assets and/or annuities that will reliably produce that amount annually. This approach creates what’s known as a liability-matching portfolio — the income generated by your fixed-income holdings equals (after taxes) your liabilities (expenses).


Talk to your advisor about potential retirement risks, and:

  • Ask him or her to run stress tests to see how your portfolio may react given a downturn or a change in your planned retirement date
  • Determine which SOR de-risk approach is within your comfort level
  • Execute your strategy

Past performance may not be indicative of future results. There is no assurance that any investment strategy will be successful. Portfolio withdrawals may require adjustments based on market performance. Annuity guarantees are based on the claims paying ability of the insurer. The market value of fixed income securities may be affected by several risks including interest rate risk, default or credit risk, and liquidity risk. The S&P 500 is an unmanaged index of 500 widely held stocks listed on U.S. market exchanges. An investment cannot be made directly in the index. The performance mentioned does not include fees and commissions which would reduce an investor’s performance.

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