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.
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