Also called sequence risk, this is the risk that comes from the order in which your investment returns occur. To put it another way, sequence of return risk is the risk that market declines in the early years of retirement, paired with ongoing withdrawals, could significantly reduce the longevity of a portfolio.
Sequencing risk is the risk that the order and timing of your client's investment returns are unfavourable, resulting in less money for their retirement. ... If this were the case, the investor's money would have run out. The consequences of sequencing risk are potentially strongest around the point of retirement.
Protecting Against Sequence Risk
This change helps to address one of the key risks retirees face with their investment portfolios – “sequence of returns” risk or the order in which you experience market returns. When investing for the long term, downturns in the market are less important because your portfolio has a chance to recover.
Sequence risk, or sequence of returns risk, analyzes the order in which your investment returns occur. It affects you when you are periodically adding or withdrawing money from your investments. In retirement, it can mean that you earn a much lower internal rate of return than what you expected.
4 Tips to Manage the Sequence of Returns Risk
Sequencing risk is the risk created by the combination of the 'sequence' in which returns are generated and withdrawals are made from a portfolio. It affects investors making withdrawals from their portfolio, and particularly those in the 'decumulation' or retirement phase.
Early Retirement is the answer
For me, early retirement is the best way to eliminate sequence of returns risk. SRR is a big issue during the first decade of retirement.
Sequential Investment Decisions. 153. each of which constitutes a fraction of the total possible investment. In any period of time, the firm must decide which investments to make. That is, the firm can initially invest in a small fraction of the project and thus reduce its financial exposure.
“You can completely eliminate sequence-of-return risk by investing the money you need to spend in retirement in a safe bond ladder or fixed annuities,” said Cotton. “If you're fortunate enough to have some left over, you can buy and hold stocks with that money.”
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