Sequence of Returns

We all know that the market cycles up and down, but sometimes we forget that when these changes occur, it could have a significant impact on our investments. In last month’s newsletter we talked about “sequence of returns” (SOR) risk and why it is important to understand how it could affect your retirement. Basically, sequence risk is the danger that the timing of withdrawals from a retirement account will have a negative impact on the overall rate of return available to the investor.

The sequence of positive and negative returns over the course of a retirement can have a significant impact when a contract owner begins taking withdrawals. A downturn early in retirement may dramatically diminish a portfolio in the long run. To demonstrate SOR risk, the table below shows two hypothetical portfolios invested directly in the S&P 500® over a 20-year period (2000-2019). Each account begins with the same initial value of $100,000 and sees the same withdrawal of $5,000 annually. The only difference is the order of returns, which have been reversed (late loss vs early loss).

As you can see, an early downturn led to a significant decline that eroded the principal to zero in 18 years. In the reverse, an up market helped sustain the principal with an ending value of $109,723 after 20 years. It is all about timing, which can be difficult because no one can predict what will happen in the future. Account withdrawals during a bear market could be more costly than the same withdrawal in a bull market. A diversified portfolio can help protect your retirement savings against sequence risk.

If you are concerned with how a market downturn could affect your retirement savings, give our office a call at 801-465-6990 and let’s get together to discuss your situation!

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