What is sequence of return risk? And should you be worried about it?

Everyday Wealth

Jean Chatzky

Investing, Business, Education

2 • 935 Ratings

🗓️ 7 September 2022

⏱️ 6 minutes

🔗️ Recording | iTunes | RSS

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Summary

Edelman Financial Engines wealth planner Isabel Barrow breaks down the meaning behind sequence of return risk for Jean and Soledad and explains what role it plays for retirees when it comes to withdrawal strategies.

Investing strategies, such as asset allocation, diversification, or rebalancing do not assure or guarantee better performance and cannot eliminate the risk of investment losses. There are no guarantees that a portfolio employing these or any other strategy will outperform a portfolio that does not engage in such strategies. Funds and ETFs are subject to risk, including loss of principal. All investments have inherent risks. There can be no assurance that the investment strategy proposed will obtain its goal. Past performance does not guarantee future results.

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Transcript

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0:00.0	This is Edelman Financial Engines Everyday Wealth,
0:06.9	This is Edelman Financial Engines Everyday Wealth
0:10.4	with award-winning journalist Soledad O'Brien,
0:13.0	personal finance expert Jean Chatsky,
0:15.0	and Edelman Financial Engine's wealth planner Isabel Vero.
0:20.0	These are two very separate challenges. Growing your money, we get that. By this
0:27.1	point 401k has been around for 35 years, we know we have to put our money in and invest it. But when it comes to taking
0:36.1	that money out that is a challenge that we have not spent enough time talking about, withdrawal strategy, and something called
0:47.0	sequence of return risk.
0:51.0	Can you explain that?
0:52.7	Sequence of return risk is really a concept that is understanding that returns are not sequential.
1:01.3	Meaning if you have a 7% long-term rate of return on average, that doesn't mean you
1:07.0	get 7% every single year.
1:09.2	In fact, what it might mean is that one year you get 14 the next year you get negative 3
1:13.0	the next year you're up 11 etc etc so over the long term you may get that
1:17.6	seven but it may never actually happen so your returns are not sequential they
1:22.3	don't follow any exact pattern. So the sequence of return
1:25.0	risk plays a role, especially for retirees, in those withdrawal rates. For example, let's
1:31.8	say you have a million dollars and you retire and you are taking out 4%, so $40,000 a year.
1:37.0	So the first year you have your million dollars, you take out your $40,000 and you got a 4% rate of return so it's great.
1:43.3	Your million dollars is still a million dollars.
1:45.6	But the next year, the portfolio or the market is down 20%, it's a bare market and all of a sudden
	...

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