When reviewing retirement projections, it’s easy to focus on average annual returns.
In reality, retirement outcomes are shaped less by averages and more by the timing of these returns—a concept known as sequence of returns risk.
EXAMPLE: How Identical Savings Lead to Different Futures
The chart below shows two couples, each starting retirement with $2.5 million and withdrawing $100,000 per year. Over 25 years, they earn the same average return.
The difference, however, is the order in which these returns occur:
Couple A: Experiences a market downturn in the first years of retirement.
Couple B: Experiences the same downturn much later.
A market downturn hits harder when you’ve just retired.
When withdrawals coincide with losses, you’re forced to sell more assets to generate the same income. This shrinks your portfolio and reduces its ability to recover because you have less capital working for you when the market rebounds.
Conversely, declines occurring later in retirement are often easier to absorb.
At this stage, your portfolio has already done the “heavy lifting,” plus it’s continued to grow, creating a financial buffer that helps your savings survive future market turbulence.
Finally, by the time a later downturn hits, your portfolio doesn’t need to support as many future years of income.
Same average returns. Very different outcomes.
RELATED: In case you missed it, we published a new post: How to Make the Decision to Retire. Market behavior is one of several key factors to consider.
Managing Sequence of Returns Risk
Windsor Wealth Management helps you address this risk by setting aside two to four years of income in a conservative investment account. This “buffer” remains stable while still providing modest growth.
It allows retirement spending to continue uninterrupted during market downturns, giving the rest of your portfolio time to recover.
For Example:
If your annual spending is $90,000, we may earmark $270,000 to cover the first three years of retirement.
This upfront reserve helps protect your lifestyle by reducing the need to sell investments when markets are volatile.
Key Action: It’s critical to plan for the “when” of your retirement to help ensure there’s enough time to set these funds aside. (Ready to retire? Reach out as soon as possible.)
Generally speaking, average returns don’t retire people.
Cash flow timing does.
–David Bunker, Financial Advisor & Licensed Fiduciary
Before You Go
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This communication was prepared with financial writer Sharron Senter’s assistance, based on interviews with David Bunker, a financial advisor and licensed fiduciary.