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Retirement Timing: The Hidden Risk of Sequence of Returns

Retiring in different decades, these two retirees faced varying returns due to a little-known risk. Learn how timing can impact your retirement planning.

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In the image we can see there is a broken wall on the ground and there are red bricks of the wall...
In the image we can see there is a broken wall on the ground and there are red bricks of the wall are on the ground. There is a car parked on the ground and there is a plant kept in the pot. There are buildings and there is a hoarding on the wall on which it's written ¨Bail Bonds¨.

Retirement Timing: The Hidden Risk of Sequence of Returns

Two US retirees, Mr. Smith and Ms. Jones, both 65 years old, embarked on retirement in different decades with identical investment portfolios. Despite starting with the same 60% stocks and 40% bonds, they faced varying returns due to a little-known risk called 'Sequence of Returns'.

The Sequence of Returns Risk, or SOR, is an 'invisible' threat that can significantly impact constant withdrawals from investments during retirement. This risk stems from the timing of returns, which can differ greatly depending on when one retires.

Mr. Smith and Ms. Jones, who retired in 1969 and 1979 respectively, experienced this firsthand. Over a 29-year period, from age 65 to 94, their portfolios, though identical in composition, grew at different rates. This was due to the sequence of returns, which varied based on their starting years. Clients preparing for retirement often focus on the flexibility, return, and risk of different asset classes, but the SOR serves as a reminder that timing can play a crucial role in retirement planning.

The Sequence of Returns Risk highlights the importance of considering the timing of returns when planning for retirement. Despite starting with the same portfolio, Mr. Smith and Ms. Jones saw different outcomes due to the SOR. This 'invisible' risk underscores the need for retirees and those planning for retirement to be mindful of the potential impact of market timing on their investments.

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