How Sequence of Returns Risk Affects Retirement Withdrawals
Investments “do not earn their average real return each year. Some years they go up, and some years they go down, as recent investors know all too well. For a retiree who is taking distributions from his or her savings, the sequence in which market returns happens will matter. If a retiree’s portfolio drops in value during the early retirement period, portfolio withdrawals will dig a further hole. Climbing out of this hole becomes increasingly difficult even if a subsequent market recovery arrives. This is sequence of returns risk. Sequence risk amplifies the impact of traditional investment volatility. To be more confident that a spending plan can work requires lowering our assumed investment return and checking if our spending goal will still be sustainable.” Dr. Wade Pfau, professor of retirement income in the Financial and Retirement Planning Ph.D. program at The American College and a principal at McLean Asset Management. He blogs on retirement research and maintains the Retirement Researcher website. Abstracted from The Wall Street Journal wealth management blog 3/3/16.