Financial Planning Fridays #158: Sequence of Return Risk

Hi friends, today I want to talk about something that doesn't always get enough attention but can have a huge impact on your retirement: sequence of returns risk. Sequence of returns risk is the idea that the order in which you experience investment gains and losses matters, especially when you're retired and taking income from your portfolio.

Please let me show you an example. Here we have two $5 million portfolios for retired clients that both average 7% per year for the next 30 years. However, look how different the balances at the end of a 30-year retirement are: $13.8 million versus $238,000. And again, both portfolios had an average return of 7% per year. The reason for the massive difference is the second portfolio gets off to a slow start with negative returns in the first three years. So as you can see, the sequence, or timing, of returns can make an enormous difference in your retirement.

This is how we manage sequence of return risk at Presilium. First, we build a strong financial plan with a diversified mix of investments designed to weather different market conditions. Second, we always keep a portion of our clients' assets in stable investments like short-term bonds and money market funds, so our clients are not forced to sell stocks when the market is temporarily down. And finally, we use a disciplined rebalancing process to take advantage of market volatility and keep our clients' portfolios on track.

The key takeaway is this: markets will always have ups and downs, but the order of those returns doesn't have to derail your retirement if you plan ahead. At Presilium, we're constantly thinking about risks like these and how to protect your long-term goals. If you'd like to see how the sequence of returns could affect your retirement plan, we would love to discuss it with you. Thank you, and I look forward to talking with you next Friday morning.