by Ludger J. Borger
President, Borger Capital Group LLC
Hey there, I want to talk to you about something crucial today – something that could make or break your retirement. If you're planning to retire soon or are already in retirement, this is for you. We're talking about sequence of return risk. I know, it sounds like financial jargon, but stick with me. This is the kind of thing that can turn your golden years into a financial nightmare if you're not careful.
You see, the markets are riding high right now. Stocks are up, your portfolio might be looking pretty sweet, and it's easy to feel confident. But there's a hidden danger lurking – a risk that most people don't even think about until it's too late.
What is Sequence of Return Risk?
Sequence of return risk is the risk that the timing of your withdrawals from your retirement account will negatively impact the overall amount of money you'll have to live on. Here’s the kicker: it's not just about how much your investments return, but when they return it.
Imagine you have two retirees, each starting with a $1 million portfolio and the same average annual return over 20 years. But their sequence of returns is different. Let me show you what I mean.
Scenario A: Losses Early in Retirement
Let's say Retiree A faces a market performance like the S&P 500 from January 1st, 2000, to December 31st 2019. They also withdraw 4% of their initial portfolio value ($40,000) each year for living expenses.
Scenario B: Losses Later in Retirement
Now, let’s look at Retiree B who has a good market run for the first 10 years and then hits a rough patch in the last 10 years, the inverse of Retiree A's performance. They also withdraw 4% of their initial portfolio value ($40,000) each year for living expenses.
Year | Performance (%) | Portfolio A Value After Withdrawal (USD) | Reversed Performance (%) | Portfolio B Value After Withdrawal with Reversed Returns (USD) |
2000 | -10.14 | $862,656 | 28.88 | $1,237,248 |
2001 | -13.04 | $715,382 | -6.24 | $1,122,540 |
2002 | -23.37 | $517,545 | 19.42 | $1,292,769 |
2003 | 26.38 | $603,521 | 9.54 | $1,372,283 |
2004 | 8.99 | $614,182 | -0.73 | $1,322,557 |
2005 | 3.00 | $591,407 | 11.39 | $1,428,641 |
2006 | 13.62 | $626,509 | 29.60 | $1,799,678 |
2007 | 3.53 | $607,213 | 13.41 | $1,995,651 |
2008 | -38.49 | $348,893 | 0.00 | $1,955,651 |
2009 | 23.45 | $381,328 | 12.78 | $2,160,471 |
2010 | 12.78 | $384,950 | 23.45 | $2,617,722 |
2011 | 0.00 | $344,950 | -38.49 | $1,585,557 |
2012 | 13.41 | $345,843 | 3.53 | $1,600,115 |
2013 | 29.60 | $396,373 | 13.62 | $1,772,603 |
2014 | 11.39 | $396,964 | 3.00 | $1,784,581 |
2015 | -0.73 | $354,358 | 8.99 | $1,901,419 |
2016 | 9.54 | $344,348 | 26.38 | $2,352,461 |
2017 | 19.42 | $363,452 | -23.37 | $1,772,039 |
2018 | -6.24 | $303,269 | -13.04 | $1,506,181 |
2019 | 28.88 | $339,301 | -10.14 | $1,317,510 |
After 20 years, Retiree A’s portfolio has significantly diminished to around $339,301.
After 20 years, Retiree B’s portfolio has significantly increased to around $1,317,510, which is significantly higher than Retiree A's portfolio. It is a difference of $978,209 all due to the timing of the return.
The Big Problem
When you're withdrawing money to live on, you’re selling investments. If you sell investments during a down market, you’re locking in losses. And those investments are no longer in your portfolio to benefit from the market recovery. This means that your money can run out much faster than you’d think.
Why This Matters Now
The markets are very high right now. While this might seem like a good thing, it actually increases your risk. If the market takes a dive just as you’re entering retirement or shortly after, you could be forced to sell investments at a loss to cover your living expenses.
Think about it: if you lose 50% of your portfolio's value you need to make 100% to break even, it’s not just a paper loss. If you need to withdraw money during that time, you’re selling those assets at a lower value. They’re gone, and you can't wait for the market to recover.
Act Now to Avert Catastrophe
Here's the bottom line: you need a strategy. You need a plan that protects you from sequence of return risk. Ignoring this could be the biggest mistake of your retirement.
So, what can you do?
Asset Class Diversification: Don’t put all your eggs in one basket. A well-diversified portfolio can help reduce risk.
Liquidity: Keep some assets liquid to cover your expenses and be ready for opportunities. This way, you won't be forced to sell investments during a market downturn and have a chance to buy at bargain prices.
Work with a Financial Advisor: This isn't something you should try to manage on your own. Professional advice can help you navigate these risks and protect your retirement.
Set Up a Strategy Call with Us
I can't stress this enough: you need to act now. Current markets are unpredictable, and retirement is too important to leave to chance. Let us help you create a plan that ensures you can enjoy your retirement without worrying about running out of money and preserving your legacy.
Don’t wait until it's too late. Schedule a strategy call with us today. We’ll work together to safeguard your future and give you the peace of mind you deserve.
Stay safe, stay smart, and let's secure your retirement together.
If you want a personal consultation with me to discuss this topic in more depth and find some personalized solutions, click on this link https://calendly.com/borgercapitalgroup/30min to schedule a free 30-minute strategy call.
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