Sequence of Returns Can Hurt in Early Retirement

Sequence of return risk is the danger withdrawals and overall income from your nest egg in retirement will suffer due to the unfortunate timing of downturns in the markets. In the charts below, you can see that during your working years, while you’re still accumulating assets, the sequence of returns has little effect if given enough time to recover losses before retirement.

But in retirement, withdrawals from your nest egg will typically compound losses caused by market downturns. If these losses occur in the first years of retirement, they can do a lot of damage to your overall income that you plan to draw from your savings. These losses may take significant time to recover, or could affect your income for the rest of your life.

This can greatly reduce the chance your retirement plan will be successful.

Proper planning and risk alignment can help mitigate sequence of return risk, and increase your income stability throughout your retirement.

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