Sequence-of-Returns Risk

The Risk Retirees Face Just Before and After they Retire

What happens in the market shortly before and after retirement–during the “fragile decade”–is more important than one might think. If retiring during or before a market downturn, the combination of withdrawals and poor performance can quickly deplete a retiree’s main source of income and make it difficult to recover. This is known as “sequence-of-returns” risk. It is important for investors to be protected from poor financial market performance during this “fragile decade.” Will they be forced to retire and begin withdrawing when the market is down? Will poor returns after retirement deplete their nest egg?

The market has always moved up and down in cycles. In fact, there have been exactly four long-term bull markets and exactly four long-term bear markets in history. When it comes to retirement, investors want the confidence of knowing they’re prepared for both.

Secular Bear and Bull Markets Chart

Why “When” Matters Most

The chart below shows sequence-of-returns risk in action. Even though both investors start retirement with the same amount, and take the same withdrawals, they have very different results. Why? Because of how different the markets perform when their retirements begin.

Two Investors Comparison Chart

Please note that the hypothetical illustration does not represent the results of an actual investment. It does not reflect any investment fees, expenses or taxes associated with investments. An average annual return of 4% is reflected for both investors. Annual withdrawals of $5,000 are taken at the end of each year.

Behind the Numbers

Not only do different market cycles affect investment performance, the order in which these cycles
occur also matters. The tables below show their annual returns over a 15-year period are the same. What’s different is the order of the returns, which has been reversed. Notice how much their investment value changes.

annual investment values good and bad markets

Many economists like Bill Sharpe agree that lifetime income streams provided by annuities can help retirees minimize waste in retirement and protect against longevity risk and sequence-of-returns risk. These lifetime income streams may be created with variable annuities and other annuities offering guaranteed lifetime withdrawal benefits (GLWB), or via immediate or deferred annuities.