"Sequence-of-returns risk is defined as the danger that poor early returns permanently impair a portfolio even when long-term averages look fine, and it is the single most underestimated threat facing retirees with meaningful assets."
"A 15% loss on a $2.4 million portfolio destroys $360,000 in value. A 15% loss on a $1.5 million portfolio destroys only $225,000. The portfolio is largest on day one of retirement, so early losses hit hardest in absolute dollar terms."
"Retiree A experiences -15%, -8%, then +22% in the first three years. Retiree B gets +22%, +18%, then -10%. Both average 7% over two decades. But Retiree A, withdrawing $96,000 annually through early losses, is forced to sell shares at depressed prices."
"The goal is to reduce how much damage a bad sequence can do before the portfolio has time to recover."
Sequence-of-returns risk poses a significant threat to retirees, as the timing of investment gains and losses can drastically affect portfolio longevity. Two retirees with identical starting balances and withdrawal rates can end up with vastly different outcomes based solely on the order of returns. Early losses can force retirees to sell shares at depressed prices, preventing recovery. Strategies to mitigate this risk include adjusting asset allocation to protect against early downturns, ensuring portfolios can withstand adverse market conditions during retirement.
Read at 24/7 Wall St.
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