Market Cycles and Retirement: Sequence of Return Risk in Portfolios

In today’s article, we’re going over market cycles and retirement, as well as how the sequence of return risks affect portfolios.

Stock prices have been down more than they have been up, and the major averages are either in or teetering on correction territory. Bond prices are lower, and yields are higher, which has created an opportunity for some but has resulted in losses for others.

A thoughtful retirement strategy must consider many factors, and here are just a few: your income needs, the order of your withdrawals from taxable and tax-advantaged retirement accounts, the income tax implications of those withdrawals, and sequence of return risk. 

What is sequence of return risk?

Just what is the sequence of return risk? In brief, it is the risk that market declines in the early years of retirement, combined with steady withdrawals, could reduce your portfolio’s outlook. 

If you’re thinking of making changes to your retirement plans or need help navigating your own personal situation, please be sure to contact our office before making any changes. We can help you look at all angles of your circumstances and create a strategy that’s aligned with your financial goals.

Market Risk and Retirement Accounts

A recent CNBC article mentioned how sequence of return risk can affect retirement accounts. It used a 20-year example – someone retiring in 2000 with $1 million in an account tracking the returns of the S&P 500, making withdrawals of $40,000 a year that increased 2% annually in view of inflation. 

A Bear Market Cycle and Retirement Accounts

In 2000, a bear market began. The 37% pullback for the S&P 500 that occurred in 2000-02 would have reduced the $1 million account to about $470,000 by January 1, 2020, the end of the 20-year period. The balance reflects the annual withdrawals of $40,000 and the 2009-20 bull market. 

Now, if the order of yearly returns were flipped, the portfolio would show much different performance. At the end of the 20-year period, the retiree would have had more than $2.3 million in that account after the exact same schedule of income distributions.

Related: What to Expect in a Bear Market

Understanding Investing and Risk

It’s critical to point out that investing involves risk, and past performance does not guarantee future results. The return and principal value of stock prices will fluctuate as market conditions change. And shares, when sold, may be worth more or less than their original cost.

The S&P 500 Composite Index is an unmanaged index that is considered representative of the overall U.S. stock market. Individuals cannot invest directly in an index, and index performance is not indicative of the past performance of a particular investment.

Navigating Risk and Volatility in Retirement

In retirement, it is vital to address risk and volatility. You have less time and may have fewer opportunities to rebuild your savings. 

Fortunately, there are ways to address the challenge of sequence of return risk. As well as manage your portfolio risk while looking for opportunities.

The stock market itself has a natural life cycle that — like life itself — is destined to encounter peaks and valleys.

It’s important to remember that we have been in similar circumstances before; we will be there again; and in between, we will experience more periods of economic and investment prosperity.

At Team WAG, we’ve been working on putting together a helpful resource to help navigate the downs of the market. 

You can download your What to do in a Down Market Guide by entering in your info below and we’ll email you a free copy.

Everyone’s situation is different, and I know the unknown can be a bit overwhelming at times.

If you need help sorting out what options would work for you and your family, please reach out to our office. We’re here to help you navigate what best suits your goals and personal circumstances and will help you find the best solution for you.