Sequence of Returns Risk

Hey welcome to this segment on sequence of return risk. To set this segment up, I wanted to show you what happens when you see a series of returns over a few years. I used the 2008 return, a -37%. Then followed by 2009, 2010. And you can see on your screen what $100K would do with those series of returns over six years. You would end in your portfolio of about $143,747. Now what we’re going to do, is we’re going to flip that sequence. Instead of a -37% being the first year return, we’re going to let it be the last year return. And so you can see on your screen, we’ve flipped the return sequence. We started with $100K, held it for the entire time. And even with the flipped sequence, still had roughly $143,747. So the sequence of return when you’re holding the investment, you’re not adding to it or taking from it, no difference. Now let’s talk about once you enter retirement and a distribution starts happening. Or maybe you’re getting close to age 72 where the required minimum distributions are going to start affecting you. Now let’s look at the sequence of return and see if there’s any risk in it. On the left side, you can see that we start with $100K. We’re going to take out 5% each year. So you’re going to see the return of -37%, And then we’re going to take out the $5K. Bump that to the next year and let it flow through. You can see when you take that big loss as your first year, after those six years, you have roughly $101,179. You’ve been taking distributions each year. Now let’s flip that. Let’s take that sequence of return, still take the $5K distribution each year. You can see that once you change that sequence of return, that you’re going to end up with about $121,921 even after taking those distributions. So this is a quick example of how sequence of return risk can impact you. You know as you get closer to retirement or as you get closer to your RMD age, it’s really important that you understand how your portfolio can be exposed to that sequence of return risk. There are solutions to that. There are ways that you can plan for it and then plan for a portfolio that will insulate yourself against selling at a loss so that you can still take that RMD or still take that distribution to enjoy retirement and let the money that’s in the market, be in the market longer. So if you have any questions, please feel free to reach. Give the number on the screen a call at any time.