
Nearing Retirement? Make Sure You’re Managing This Significant Risk
If you’re avoiding looking at your 401(k) balance during periods of market volatility, you’re not alone. While the S&P 500 has historically produced an average annual return of 11%, recent market downturns may be impacting your portfolio, especially if you are drawing down assets. If you are a retiree or nearing retirement, managing the sequence of return risk in your portfolio during a declining market is essential since it is a significant risk to your assets lasting through retirement. The sequence of returns impacts investors when they are either adding to or withdrawing money from their investments, which can create risk depending the market conditions at the time. If an investor is not doing either, there is no sequence of returns risk. However, suppose an investor is drawing down their portfolio and not contributing new capital, for example, when they’re retired. In that case, there is the risk that the timing of withdrawals will negatively impact the portfolio’s overall rate of return. The sequence of the withdraws is critical to the retirement portfolio lasting the investor’s lifetime: Timing is everything- the timing of the withdrawals can damage the overall return and the portfolio that may not be recoverable. Withdrawals during a bear market are more damaging than during a bull market. If a bear market lasts more than a few months, each withdrawal is not being offset by contributions, leaving the portfolio unable to recover what was withdrawn despite future gains. The sequence of return risk can impact market-sensitive investments. Diversified portfolios are less likely to be impacted by the sequence of return risk. When is the optimal time to review your portfolio? When the amount of risk you’re comfortable with