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The variability of market returns from one year to the next can imperil retirement savings. Yet too few accounts mitigate the damage that market downturns can trigger, especially when they take place in the early years of retirement. Here are ways to talk about mitigating exposure to sequence of return risk.

The impact of cash flows and sequence of returns on retirement savings

Invest $1 million dollars into an account, leave it there for 30 years, and your ending balance will reflect the average annual return for the period.

However, in retirement accounts—where balances typically build with contributions made over many years or decades—it’s the sequence of the returns that helps determine the ending balance as well as the quality of the retiree’s lifestyle.

While any investment account is vulnerable to market swings, retirement accounts are uniquely sensitive to the timing of market ups and downs- especially to downturns that occur in the years immediately preceding and following retirement.

A downturn at this inflection point—when the wealth accumulated typically is at its greatest and withdrawals begin—can have a long-term and devastating impact on a retiree’s life. 

Dreams realized—or derailed

Consider the experiences of three retirees in the hypothetical scenarios.

All three are alike in that they enter retirement with an initial $1 million, earn an average annual 5% rate of return, and withdraw 4% annually (adjusted for inflation).

Their finances diverge, however, in their respective accounts’ sequence of returns: 

  • Retiree A earns a steady average 5% return each year
  • Retiree B begins retirement with great returns—but has a poor rate of return in later years
  • Retiree C starts retirement with poor returns but enjoys a strong finish

As the chart shows, Retiree B clearly comes out ahead, with an income stream that lasts for 30 years and an ending balance that’s far higher than that of the other two. In contrast, 30 years later, Retiree A has significantly less wealth than Retiree B. And Retiree C has run out of money.

How to mitigate sequence of return risk

Plan sponsors and participants will be well served by understanding sequence of return risk and factoring it into their investment decisions.

There are many ways to help retirees avoid dollar-cost “ravaging,” including these:

  • Balance risk (i.e., equity exposure) and diversification at the beginning of retirement.  Choosing an investment allocation or a target date fund with a glide path that aligns to retiree spending behavior can help balance the tradeoffs between risk and reward while helping to fund their lifestyle
  • Adopt a dynamic spending strategy that adjusts withdrawal amounts based on market conditions; for example, withdraw less during bad markets
  • Purchase an annuity with guaranteed income features
  • Introduce in-plan retirement income solutions that offer lifetime income along with downside protection; for example, a guaranteed income feature within a target date fund


Minimizing the impact of poor returns early in retirement can reduce the risk of an investor’s savings. Click here to read more.  

TARGET DATE FUNDS. Target date funds are funds with the target date being the approximate date when investors plan to start withdrawing their money. Generally, the asset allocation of each fund will change on an annual basis with the asset allocation becoming more conservative as the fund nears the target retirement date. The principal value of the fund(s) is not guaranteed at any time, including at the target date.”)
Annuity guaranteed benefits, such as guaranteed income for life are only as good as the insurance company that gives them. While it is an uncommon occurrence that the insurance companies that back these guarantees are unable to meet their obligations, it may happen.