Sequence of Returns Can be Devastating
The concept of the Sequence of Returns illustrates that the order in which your portfolio gains or loses can dramatically affect its value when you are in the distribution phase of retirement. The years immediately before and after retirement—specifically, the first five years—are the most critical period.
Taking distributions from your portfolio while experiencing a down market in these early retirement years could significantly deplete your funds, leaving you with insufficient money to last through your retirement years. This is a topic Wall Street tends to be silent about; the reason being that they want investors to keep their money in the stock market, ensuring their earnings through fees, irrespective of whether the investor is making or losing money.
The Impact of an Economic Downturn at Retirement
To understand the impact, consider these two contrasting scenarios illustrated by charts in the document:
- If you started with $200,000 in the year 2000 and took 10% annual withdrawals, with heavy losses in the first three years, by 2018 your account would be reduced to zero. Essentially, you would be out of money.
- On the flip side, if the sequence of returns and losses were reversed, starting again with $200,000, but this time your money grows in the first five years and suffers heavy losses in later years, the account balance would stand at $338,828, versus zero.
This stark contrast highlights how critical the sequence of returns is, especially in the early stages of your retirement.
The Future and Your Account
For more detailed advice and strategies on protecting your retirement portfolio, contact Wealth Concepts Group at 832.880.5555.