{"id":3065,"date":"2016-02-03T14:53:06","date_gmt":"2016-02-03T19:53:06","guid":{"rendered":"http:\/\/162.223.13.186\/~zacksim\/experiencing-sequence-return-risk\/"},"modified":"2022-02-26T13:23:01","modified_gmt":"2022-02-26T13:23:01","slug":"experiencing-sequence-return-risk","status":"publish","type":"post","link":"https:\/\/zacksim.com\/blog\/experiencing-sequence-return-risk\/","title":{"rendered":"Experiencing Sequence Return Risk?"},"content":{"rendered":"<\/p>\n

Regardless of whether you are retired or thinking about it, understanding Sequence Return Risk could be critical. The concept becomes especially important as markets turn volatile, as they are now. Here’s a run-down on Sequence Return Risk so you can prepare as needed…<\/p>\n

Why \u201cSequence Return Risk\u201d is Critical for Retirees<\/strong><\/p>\n

Have you ever heard of \u201csequence return risk?\u201d Don\u2019t worry \u2013 not too many people have. But, for retirees especially, it is one of the most important considerations when it comes to how \u2013 and when \u00ad<\/em>\u2013 you withdraw money from your portfolio. Mismanaging your retirement income by finding yourself on the wrong end of \u2018sequence return risk\u2019 could mean running out of money a lot faster than you think.<\/p>\n

The Effect of Sequence Return Risk on Your Portfolio<\/strong><\/p>\n

At the heart of this risk to your retirement income is: what could happen to your portfolio if the market declines just as you start taking retirement income<\/em>? <\/p>\n

An example will help you understand the impact. Let\u2019s say you buy a stock for $10 and it drops to $5 \u2013 that\u2019s a 50% loss. Some folks might think you only need a 50% gain to make up those losses, but you actually need more. A 50% gain on $5 would be $2.50, putting your investment at $7.50. In order to get back to $10, an investor would actually need a 100% gain on the $5 stock, a much larger percentage than that which drove the loss.<\/p>\n

And, that\u2019s where the trouble lies with sequence return risk. If your portfolio experiences declines early-on in your retirement, and coincides with you taking retirement income withdrawals, it becomes increasingly difficult to make up that lost ground over time. Not only do you have to recoup the market-induced losses, you also have to recoup your withdrawal rate (commonly 3% – 4% of portfolio for retirees). If the market declines continue, you\u2019re nest egg will grow smaller at a faster pace, meaning you need larger gains to get back to square one. To make matters worse, many retirees mistakenly react to losses by becoming more conservative, giving them a lower chance of recouping lost capital. It can become a self-fulfilling prophecy.<\/p>\n

How to Minimize Sequence Return Risk<\/strong><\/p>\n

You can\u2019t control where the market goes in any given year or how your portfolio will perform (unless you just remain in cash). But, what you can control is how you plan your retirement income and spending.<\/p>\n

When it comes to retirement income, retirees should aim to be agile in two ways:<\/p>\n