Understanding Sequencing Risk in Retirement

By Brent Meyer — SafeMoney.com Founder & Editor Reviewed by Licensed Financial Professionals  |  SafeMoney.com — Trusted Since 2011  |  Updated Regularly Quick Answer: Learn about sequencing risk in retirement planning and how safe money alternatives can help protect your savings. Explore your options today! If you look at any financial commentary, there is at least an article a day talking about investment risk . Investment risk, or the risk of losses due to market downs , is always something that we should be conscious of. But, for retirement investors, there is an even bigger risk than investment risk: sequencing risk. This type of risk can be more dangerous than pure market risk because of the effects that it can have on your long-term retirement outlook. This can have a nasty impact especially if your money takes a hit in your early retirement years. Sequencing risk looks at the order in which your portfolio returns occur. If you take losses early in your retirement, then it will impact your finances for the rest of your life. And you might well spend the rest of your retirement playing “catch-up” from those losses, especially if you were already drawing income from your portfolio and compounding the effects of those losses even further. Sequencing risk can have strong effects on people’s financial wellness that can span years. So, it’s critical to have a strategy in place for this possibility, especially if you are in the retirement red zone (within 10 years before or after retirement). Why Is Sequencing Risk a Greater Threat? Dr. Wade Pfau is one of the leading researchers in retirement planning, income strategies, and sequencing risk. He noted the greater weight of sequencing risk versus investment risk in an article he wrote in an article appearing in Advisor Perspectives: “Retirees face market risk, which concerns how market volatility causes average investment returns to vary over time. Sequence of returns risk adds to the uncertainty related to overall investment returns. The financial market returns experienced near one’s retirement date matter a great deal more than most people realize.” “Even with the same average returns over a long period of time, retiring at the start of a bear market is very dangerous; wealth can be depleted quite rapidly as withdrawals are made from a diminishing portfolio and little may be left to benefit from a subsequent market recovery.” He continued: &#822