What is sequence of returns?

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The concept of "sequence of returns" refers to the order in which investment returns occur, and it significantly impacts the sustainability of a retirement portfolio, especially in the first few years of retirement. This is primarily due to the effect of withdrawals on the portfolio during market downturns. If negative returns occur early in retirement while withdrawals are made, it can substantially diminish the longevity of the portfolio. This risk arises because selling assets when their value is down permanently reduces the amount of capital that could otherwise benefit from potential future market recoveries. Understanding and planning for sequence of returns risk is essential in retirement planning to avoid depleting retirement funds prematurely 1 2 3.

Tackling Sequence of Returns

Jonathan and Brad discuss the long-awaited episode on Sequence of Returns with Big Ern. They explore the importance of safe withdrawal rates and how the returns in the first few years of retirement can dictate success or failure.

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035R | The 4% Rule
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