Maximize Your Retirement with Senior Financial Services Inc Sequence of Returns and Retirement Planning Part 1

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What is Sequence-of-Returns (SOR) Risk?

• Definition: Sequence-of-returns risk is the risk that the order in which investment returns occur will negatively impact the sustainability of retirement savings.
• It’s different from average return: a portfolio with the same average annual return can last much longer or shorter depending on the sequence of gains and losses.

Key point: Early negative returns in retirement can be devastating because you are withdrawing funds at the same time the portfolio is declining.

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Example

Scenario	Portfolio	Withdrawals	Year 1 Return	Year-End Balance
Bad early market	$1,000,000	$50,000	-20%	$760,000
Good early market	$1,000,000	$50,000	+20%	$1,170,000

• Both portfolios may average 5% annual growth over 10 years, but the first scenario may run out of money earlier due to SOR risk.

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 Why SOR Risk Matters in Retirement

1. Retirement withdrawals are fixed or growing (inflation-adjusted)
• Unlike accumulation years, retirees cannot “wait out” market downturns; they are spending money annually.
2. Early retirement is the riskiest period
• Losses in the first 5–10 years have an outsized impact on portfolio longevity.
3. Even a well-diversified portfolio is not immune
• Diversification reduces volatility but doesn’t eliminate SOR risk if withdrawals continue during negative years.

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 Strategies to Manage SOR Risk

A. Income Sequencing

• Spend money from cash or low-risk accounts first, delaying withdrawals from equities until the market recovers.
• Example: 1–3 years of cash or short-term bonds as a buffer for early retirement spending.

B. Diversification

• Blend equities, bonds, and other assets to reduce portfolio volatility.
• More stable portfolios reduce the impact of early losses.

C. Dynamic Withdrawal Strategies

• Instead of fixed withdrawals (like 4%), adjust withdrawals based on portfolio performance.
• Reduces the risk of depleting savings after a market downturn.

D. Guaranteed Income Solutions

• Annuities (Immediate or Deferred, Fixed or FIA) can provide a base guaranteed income, insulating essential expenses from market fluctuations.
• Example: Fixed Indexed Annuity (FIA) can protect principal while allowing some market-linked growth.

E. Sequence-of-Returns Modeling

• Use retirement planning software to simulate different return sequences (Monte Carlo simulations) to assess probability of portfolio success.

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 Practical Implications for Retirement Planning

• Timing matters: Market losses early in retirement are worse than the same losses later.
• Income layering: Combine Social Security, pensions, and annuities with market-dependent investments to reduce reliance on withdrawals from volatile accounts.
• Flexibility: Retirees who can adjust spending in bad years reduce the impact of SOR risk.
• Longevity planning: SOR risk interacts with lifespan — the longer you live, the more dangerous early losses become.

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 Bottom Line

1. Sequence-of-returns risk can dramatically shorten portfolio longevity if not managed.
2. Planning strategies include:
• Cash buffers for early retirement
• Diversified portfolios
• Dynamic withdrawals
• Guaranteed income sources like annuities
3. Proactive planning with SOR in mind is essential for a secure retirement.