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The Biggest Threat to a Successful Retirement

The Biggest Threat to a Successful Retirement

September 21, 2023

The biggest threat to a successful retirement: Sequence of Returns Risk

Sequence of returns risk refers to the potential danger posed by the timing of investment returns, particularly for individuals who are nearing retirement or already retired. It's a concept commonly discussed in the context of retirement planning and managing one's investment portfolio.

When you're saving for retirement, the order in which your investment returns occur can significantly impact the overall value of your portfolio and the income it can generate. Sequence of returns risk becomes particularly important for pre-retirees and retirees because they are withdrawing funds from their portfolio to cover living expenses.

Here's why it matters:

Portfolio Depletion: If a retiree experiences poor investment returns early in their retirement when they're withdrawing money, it can lead to a significant reduction in the portfolio's value. This can result in a situation where the portfolio runs out of funds sooner than expected, potentially leaving the retiree with insufficient savings to cover their ongoing expenses.

Losses Magnification: When you're withdrawing money from your portfolio, any market losses are magnified because you're not only losing the value of those assets but also the income they were supposed to generate.

Limited Time to Recover: Younger individuals have more time to recover from market downturns because they have more years of potential growth ahead. However, retirees have a limited time horizon and might not have the luxury of waiting for the market to rebound.

Inflexibility: Once you're retired, you may not have the option to increase your income sources, such as going back to work, as easily as you would when you were younger. This means that you might have to continue withdrawing funds from your portfolio even during market downturns.


To manage sequence of returns risk, pre-retirees and retirees can consider the following strategies:

Diversification: A well-diversified portfolio can help reduce the impact of poor performance from a single asset class.

Asset Allocation: Maintaining an appropriate mix of assets based on your risk tolerance and time horizon can help mitigate the impact of market volatility.

Bucketing Strategy: Dividing your portfolio into different "buckets" based on time horizon and risk tolerance, with short-term buckets holding stable assets and longer-term buckets containing more growth-oriented assets.

Flexible Withdrawals: Consider adjusting your withdrawal rate during market downturns to preserve your portfolio's longevity.

Guaranteed Income Sources: Incorporate guaranteed income sources like annuities or Social Security to provide a baseline level of income that's not subject to market volatility.

Professional Guidance: Work with financial advisors who specialize in retirement planning to create a strategy that considers sequence of returns risk and other potential challenges.


Overall, sequence of returns risk highlights the importance of careful planning, asset allocation, and risk management as you transition from accumulating wealth to relying on your investments for retirement income.