Peter Simmons
Sequence of returns risk describes the danger that a market downturn hitting early in retirement can permanently damage a nest egg, even if long term average returns stay the same. The remedy many advisors use is a cash and bond buffer that funds spending during downturns so retirees never have to sell stocks at a loss.
At a Glance
- The five years before and after retirement, sometimes called the fragile decade, carry the highest sequence risk.
- Selling depreciated shares to cover living expenses locks in losses and permanently shrinks a portfolio's principal.
- A dedicated cash and short duration bond bucket lets retirees skip equity sales during a downturn.
- Vanguard and Morningstar research both stress that fixed income buffers must be temporary, not a permanent shift in allocation.
- Behavioral coaching, including automated transfers that mimic a paycheck, helps retirees avoid panic selling.
Why the First Years of Retirement Are So Fragile
The move from accumulating savings to drawing them down is arguably the riskiest stretch a retiree will face. If markets fall just as withdrawals begin, the math turns unforgiving. Pulling money from a portfolio that is already losing value means selling more shares to generate the same dollar amount, which leaves fewer shares behind to participate when prices eventually recover.
Morningstar research has found that two portfolios can post identical average returns over thirty years, yet one can run dry more than a decade earlier than the other simply because of when the losses occurred. Benjamin M. Howarth, a financial advisor and Special Care Planner, put it bluntly: without a structured strategy, sequence risk can determine whether a retirement succeeds or whether the money runs out
Elizabeth Daniels