Sequence of Return Risk

As mentioned in our previous blog (Monte Carlo and Retirement Success), the sequence in which you earn returns plays an important role when planning for a successful retirement. A significant decline in the value of your portfolio near or at the beginning of retirement is among the most potentially destructive scenarios. This is due to withdrawals to fund your spending, the impact on future growth and a portfolio’s struggle to regain lost ground. It can cause a portfolio’s longevity to decline faster than the retirees. 

In the chart below, we show and compare the portfolio values of someone who is in the Accumulation phase (working) and someone who is in the Distribution phase and taking withdrawals (retired). Each portfolio had a starting value of $1.25 million with the Distribution phase portfolios withdrawing $50,000 per year indexed for inflation. We ran two scenarios using returns from 2008 through 2017.  In the Accumulation 1 and Distribution 1 scenarios we used the actual returns for a balanced portfolio (60% stocks/40% bonds) which reflects a loss of 22% in 2008. While the Accumulation 2 and Distribution 2 scenarios reflect the exact inverse with a loss of 22% in 2017. We can clearly see that in the Accumulation phase the sequence of returns has no impact on the final outcome since there were no withdrawals.  On the other hand, there is a sizable effect during the Distribution phase. The gap over a 25-30 year retirement would be even wider.

Nov Blog

According to data and analysis done by PIMCO, consider a retiree who had a $1 million portfolio which allocated 60% to stocks and 40% to bonds in 2007. Despite the 51% drop from October 2007 to March 2009, the portfolio would have recovered fully by 2011 and grown to about $2 million by 2017 if it had been left untouched.  In a similar scenario in which the retiree was withdrawing $50,000 each year the outcome would be far different. Even today, 12 years later, their portfolio would be worth only $1.2 million.

Another issue that can arise from a market downturn near or early in retirement is de-risking or scaling back equity exposure at market bottoms. Although this might feel better in the short- term, it can lead to longer term issues. Taking the same time period as the previous example (2007-2019), if someone had de-risked to 40% stocks and 60% bonds in 2009, the value of their portfolio would be $920,000 rather than $1.2 million. If a retiree had responded in a more extreme way and allocated their entire portfolio to cash to hide from further market erosion the portfolio value would only be $306,000.  In both de-risking scenarios, the retiree has converted temporary losses into permanent losses. 


According to Cerulli Associates, nearly 60% of individuals with advisors lack a retirement income plan and that number rises to 80% for individuals without an advisor. There are many ways to lessen the impact of potential negative returns when you are approaching or in retirement.

  1. Creating a long-term retirement funding and investment plan to which you will adhere.
  2. Tactical rebalancing (buy low, sell high/take profits).
  3. Adjusting spending in response to changes in your portfolio value. 
  4. Overweighting undervalued assets (assets that have performed worse relative to other asset classes) and underweight or take profits on those that have outperformed.
  5. Understanding the upside and downside capture of your investments, mutual funds and overall portfolio. How much does your portfolio follow the broader market on the way up and the way down? 
  6. Owning a truly diversified portfolio. Did you know that 10 stocks account for 21.5% of the S&P 500’s value and the top four (Microsoft, Apple, Amazon, Facebook) make up 12.75%.

A stock market meltdown leading up to retirement or in the early years of retirement can have destructive long-term effects.  Understanding the potential scenarios along with proactive planning and sensible strategies for mitigating the impacts are paramount to long-term success.