HOW MUCH CAN YOUR SEQUENCE OF RETURNS AFFECT HOW LONG YOUR MONEY LASTS ?
Could the difference be a few months, or a few years - or longer? Will Lady Luck be on your side?
First a definition from Investopedia.
Sequence risk, also called sequence-of-returns risk, is the risk of receiving lower or negative returns early in a period when withdrawals are made from an individual's underlying investments. The order or the sequence of investment returns is a primary concern for retirees who are living off the income and capital of their investments.
To shed some light on this, let's look at two distinctly different scenarios.
You start withdrawing your retirement income in an up market. We’ll start with four years of varying annual returns. These include very good, good, and not so good returns, but with compounding they’ll average a respectable 6% increase over time. And then we’ll keep repeating that same sequence of annual returns – in the exact same order – until your annual withdrawals have completely used up the asset
See below: Money lasts 37 years. This is the good scenario!
You start withdrawing your retirement income in a down market. We’ll use the same annual returns as before, and keep repeating the returns as before, with only the sequence of those numbers changing – so even though the compounded returns still average +6% overall, this time, the worse annual returns began first. A much different scenario...
Your retirement income could have run out 13 years sooner...
In this example, by starting retirement in a down market, you could have lost over 10 years of income – and only because you could have the same returns in a different order. That’s the risk that comes with your sequence of returns. Unfortunately, there’s no way to predict how much the market will be up or down when you start your retirement.
What should you do?
PROTECT YOUR PRINCIPAL in case Lady Luck takes the day off.
That's just the way it works!
Required disclosures: Investment advisory services offered through Brookstone Capital Management, LLC (BCM), a registered investment advisor. BCM and (Strataxa Retirement Advisors, LLC) are independent of each other. Insurance products and services are not offered through BCM but are offered and sold through individually licensed and appointed agents.
Information provided is not intended as tax or legal advice, and should not be relied on as such. You are encouraged to seek tax or legal advice from an independent professional