Sequence of Returns

The Risk

When nearing retirement and contemplating withdrawal strategies, there are various factors to consider such as timing, amounts and tax implications. While I’m not going to address these particular factors today, I am going to discuss one of the critical risks that all retirees who are dependent upon their retirement accounts to fund their life in the post-work years face, sequence of returns risk.

Sequence of returns risk is the danger that required and/or necessary withdrawals from a retirement account occur during and after a major decline in the overall value of an account. The unfortunate timing of such withdrawals permanently reduces the asset base as the money is removed from the account and is not given the opportunity to recover the value lost due to the decline in asset values. Furthermore, most retirees are not contributing additional capital to their retirement accounts once they begin taking distributions. As a result, they can’t buy more at the lower asset values like they could during their working years.


There’s no fool proof way to fully protect yourself against sequence of returns risk. Some of it is just dumb luck. If you’re retired during a bull market you’re going to be in a lot better shape than someone who is retired and making withdrawals during a bear market. That said, a diversified portfolio is probably still the best way to protect your portfolio against this risk. Historically, the types of assets that have contributed the most to this risk are naturally more volatile assets such as stocks and commodities. Government and high grade corporate bond prices have not fluctuated as much historically as stock and commodity prices have, providing fairly reliable protection in a properly constructed portfolio.

Two other potential options to help offset sequence of returns risk are to plan on working longer and saving more. I know both of these are commonly referenced remedies to many of the risks retirees and prospective retirees, but they really can go a long way in shoring up retirement reserves.


One of the things I worry about a lot are people nearing retirement at the later stages of a business or stock market cycle that are heavily concentrated in equities. Think of the end of the 1990s. We were at the tail end of a prolonged bull market in 1998/1999. Tech stocks were all the craze and many investors were heavily concentrated in these names. Imagine if you were planning on retiring sometime during the 2000-2003 time frame and your portfolio was concentrated in the popular tech stocks of the day. Your retirement account would have taken a big hit and you may have had to work longer than anticipated or you may have been forced to take withdrawals from your IRA as its overall value was meaningfully declining. It took just over seven years (May 2007) for the market to again reach the peak it sustained in March 2000. Unfortunately, in less than two years from May 2007, the market went on to lose over 50% of its value. Investment portfolio gains and losses come and go. However, there’s no way to predict how prolonged they may be. Risk management is a very important element of portfolio management.

Today, we’re over 10 years into an uptrend from the lows reached in March 2009. The trend could continue for the foreseeable future or it could turn quickly. Nobody knows. If you’re planning on retiring in the next few years and are heavily concentrated in stocks (>60%) you may want to consider moving to a more conservative asset allocation. Frankly, a 40% or 50% allocation to stocks may be too high right now for anybody approaching retirement in the next five years that is expecting to use funds from an investment account to help fund life after work.


Remember Ray Dalio’s words of wisdom in the piece we referenced recently. “Diversifying well is the most important thing you need to do in order to invest well.” I would add planning well and executing well to Mr. Dalio’s diversifying well in order to retire well.