Navigating Sequence-of-Returns Risk During Retirement

While investment markets tend to trend higher over time, they rarely do so in a straight line.  Winning streaks followed by pullbacks are all part of the normal ebb and flow of investing. However, when you begin to tap your savings come retirement, how your portfolio performs in the first few years takes on special significance. 

How the sequence of your returns can affect your portfolio

Whether you experience a rising or declining market early in retirement can be the difference between enjoying financial security and outliving your money. 

Once you start drawing on your nest egg, positive investment performance early on can add the extra growth needed to sustain your savings, even if markets do poorly later on.  On the other hand, if you see negative returns in the beginning it will be difficult for your savings to recover.  

Let’s take the performance of two hypothetical portfolios to illustrate how sequence-of-returns risk can impact your retirement.  The key difference is Portfolio 1 has strong results – a positive sequence of returns – in the early years of retirement, while Portfolio 2 suffers negative returns first.

In this Scenario we are assuming a 6% ($36,000) annual withdrawal rate from each portfolio

While both portfolios enjoy the same 5% average annual return over six years, Portfolio 1 is worth nearly $100,000 more than Portfolio 2 because it avoided down markets at the start.

Protecting your savings

Fear of market volatility can tempt you into abandoning growth investments in favour of guaranteed vehicles like GICs.  But low interest rates will make it tough for your portfolio to overcome two serious threats: taxes and inflation. 

You can take steps to protect your savings from sequence-of-returns risk.  One way?  Hold enough cash or redeemable GICs in reserve to cover your short-term living expenses so you’re not forced to fund your withdrawals by selling investments at a market low.  Another?  Consider annuities to generate predictable income regardless of what interest rates or financial markets do.

Don’t live with the worry of outliving your savings, work with us to secure your future. Contact a Weyburn Credit Union financial advisor today to arrange a complementary review of your retirement plan.