Navigating Sequence of Returns Risk in Retirement
Planning for retirement involves not only saving diligently but also strategically managing your investments to ensure a secure financial future. Stock market volatility and inflation are two of several risks that people face when investing for retirement.
These risks raise an important question, “Will my portfolio funds last throughout retirement?” The answer will depend upon certain factors including an often-overlooked risk known as the sequence of returns, which can significantly impact the longevity of your retirement income.
Planning for retirement involves not only saving diligently but also strategically managing your investments to ensure a secure financial future. Stock market volatility and inflation are two of several risks that people face when investing for retirement.
These risks raise an important question, “Will my portfolio funds last throughout retirement?” The answer will depend upon certain factors including an often-overlooked risk known as the sequence of returns, which can significantly impact the longevity of your retirement income.
What is Sequence of Returns Risk?
Sequence of returns risk refers to the specific order in which investment returns occur, particularly in the years leading up to and during retirement. It can have a profound effect on your portfolio’s long-term value and sustainability, especially when you’re withdrawing funds for income.
Once you retire and start taking withdrawals from your investment portfolio, annual market returns become critically important. Significant market volatility and losses in the early years of retirement can shorten the longevity of your portfolio, even if above-average market returns occur in later years.
The following example puts sequence risk into perspective. Consider the sequence of returns and their impact on year-end portfolio values under two five-year market scenarios. If you start with a portfolio value of $1,000,000, withdraw $100,000 per year, and earn total returns of 10% in the first three years and negative 10% in years 4 and 5, you’d end up with $620,000 by the end of year 5 in Scenario 1.
Scenario 1
Now, if the sequence of returns happens in the reverse order, your balance at the end of year five would be $494,220, as shown below.
Scenario 2
For this example, the sequence of returns between the two scenarios resulted in a difference of 20% just by simply reversing the order of returns. In other words, Scenario 2 had $125,780 less in portfolio value at the end of year 5 because the negative years occurred at the beginning of the period when more assets were in the account. This can have a devastating impact on one’s retirement income and overall portfolio longevity.
Accumulate Smarter and be Better Prepared
Imagine if you could skip taking income from your retirement account during economic downturns by having alternate and dependable sources of income that are not directly impacted by short-term market volatility? Alternating between retirement income sources during volatile times could dramatically extend the longevity of your retirement assets. See how this can impact retirement
You can’t predict future market downturns, but you can choose to accumulate smarter! We can help you plan, be better prepared for market downturns, and reduce the impact they will have on your retirement. Protect your future, today.
Accumulate Smarter and be Better Prepared
If you want to own equities and other risk assets for long-term growth potential in retirement, it’s crucial to be able to weather economic downturns or risk shortening the longevity of your retirement assets.
Imagine if you could skip taking income from your retirement account during economic downturns by having alternate and dependable sources of income that are not directly impacted by short-term market volatility? Alternating between retirement income sources during volatile times could dramatically extend the longevity of your retirement assets.
You can’t predict future market downturns, but you can choose to accumulate smarter! We can help you plan, be better prepared for market downturns, and reduce the impact they will have on your retirement. Protect your future, today.
IMPORTANT DISCLOSURES
* The sequence of returns risk scenarios above are intended for illustrative purposes only. Sample calculations should not be used to calculate personal risk. Individuals should seek financial professionals for customized risk analysis.
Product availability varies by carrier, state, and individual eligibility. Not all products listed are available in all states or to all applicants. Product descriptions on this page are for general informational purposes only and do not constitute a solicitation or offer to sell any specific insurance or annuity product. All products are subject to underwriting approval and applicable state insurance regulations. Riders and benefits are subject to additional charges, terms, conditions, and limitations. Variable products involve investment risk, including possible loss of principal, and are sold by prospectus. FundaDream Insurance Solutions, Inc. is a licensed California insurance corporation. Consult the applicable carrier contract for full terms, conditions, and limitations. FundaDream’s charitable giving is made from general corporate revenues at the sole discretion of FundaDream leadership and does not constitute compensation to any licensed insurance professional.
The decision to purchase life insurance should be based on long-term financial goals and the need for a death benefit. Life insurance is not an appropriate vehicle for short-term savings or short-term investment strategies. While the policy allows for loans, you should know that there may be little to no cash value for loans in the policy’s early years.
The information provided is not written or intended as specific tax or legal advice. FundaDream, its employees and representatives are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.
Insurance products and services are offered through FundaDream Insurance Solutions, Inc., California License No. 0M95835