Sequence-of-Returns Risk: What If You Retire at the Wrong Time?

Have you thought about what would happen if the stock market took a big downturn just as you began taking money from your portfolio in retirement? For those who are newly retired, down markets can be especially painful – sometimes even lethal for their portfolios. And there’s actually a name for this kind of scenario: it’s called sequence-of-returns risk.  

Simply put, if you see big losses in your portfolio early on in retirement while you’re also taking withdrawals, you’re reducing the number of assets available to you if and when the market eventually recovers. If the big market downturn happens later in retirement, it’s not quite as bad, the portfolio potentially went up instead of down even after taking distributions. But we can’t control the next “sequence”. And early on, that can mean big trouble.  

So what can you do about it? Naturally, you have no control over things like a falling stock market, bond yields, or inflation. But you do have options — some good, some not so good.  

Delay the Date of Your Retirement

One option is to try to delay the date of your retirement. But that’s probably not what you’d call an attractive option. And in many cases, you don’t have control over that anyway (because you get laid off, you can’t physically work anymore, or the mental toll is just too much). So let’s set that one aside. 

Adjust Your Income Strategy

You could instead opt to simply settle for lower or even no income during the years when the market is in a downturn. But this is another bad idea, in our opinion and we don’t think you should let the stock market dictate how much money you have to take a vacation, visit the grandkids, or make sure your mortgage gets paid.  

Segment Your Assets

A much better idea, we think, is to portion off anywhere from five to seven years of non‐volatile assets from your portfolio – by that meaning, assets not affected by the stock market – and use those funds for income. You can then place another chunk of money in medium‐term assets, which can be exposed to more risk, but also still potentially giving you some measure of relative safety. The remainder can go into longer‐term assets, like growth and value‐oriented stocks. Because this money doesn’t need to be tapped for 15 years or more, the inherent risk may be mitigated over the course of many years.  

This is a simplified version of what we call a Buckets Strategy, where the goal is to take your income from non-volatile sources when the markets aren’t cooperating, giving them time to recover, and potentially protect your income. 

So the issue here really isn’t about retiring “at the wrong time.” Instead, it’s more about setting up your distribution strategy from your portfolio. It’s all about managing your future, where the goal is to get your money to live longer than you do. And that just happens to be our goal, too. You want some help with this?  It’s what we do every single day. Just give us a call; we’re always here for you.