Chart Talk: June 12th 2024


The sequence of returns, also known as sequence risk, refers to the order in which positive and negative returns occur over time. This concept is important for those individuals either later in their work career and critical for those early in their retirement that are taking withdrawals.  


As many of our clients are in the asset distribution phase of their financial lives, factors such as volatility and predictability are as important as returns are to a portfolio over the accumulation phase.


If an investor experiences negative returns early in retirement, the ultimate portfolio value can suffer significantly, especially if that client has assumed an aggressive rate of distribution.  This is because withdrawals compound the losses, leaving less capital to benefit from when the market recovers.  Conversely, if positive returns occur early, the portfolio has a better chance of growing and withstanding subsequent market downturns.


Below is an example from JP Morgan:

  • 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
Source: J.P. Morgan Asset Management. For return sequencescenarios, see slide titled “Sequence of return risk – lump sum investment.”Hypothetical return scenarios are for illustrative purposes only and are notmeant to represent an actual asset allocation.*Spending in retirement chart assumes an initial $1,000,000 and a4% withdrawal adjusted annually for inflation of 2.5%.

As the chart above illustrates, 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 while Retiree C has run out of money.

To mitigate sequence risk, strategies such as maintaining a cash reserve of 3 to 5 years or distributions, diversifying investments, and adjusting withdrawal rates based on market conditions can be employed. These approaches help ensure that retirees do not have to sell assets at a loss, preserving the longevity of their portfolio.

Understanding the sequence of returns is vital for effective retirement planning and long-term financial security.

This presentation is not an offer or solicitation to buy or sell securities. The information contained in this presentation has been compiled from third party sources and is believed to be reliable, but its accuracy is not guaranteed and should not be relied upon in any way, whatsoever. Fagan portfolio characteristics and holdings are subject to change at any time and are based on a representative portfolio. Holdings and portfolio characteristics of individual client portfolios may differ, sometimes significantly, from those shown. This information does not constitute, and should not be construed as, investment advice or recommendations with respect to the securities listed.

Additional information including management fees and expenses is provided on our Form ADV Part 2. The actual return and value of an account fluctuate and, at any time, the account may be worth more or less than the amount invested. Bond Investments are affected by interest rate changes and the credit-worthiness of the issues held in the portfolio. A rise in interest rates will cause a decrease in the value of fixed income positions. Past performance results are not indicative of future results.”

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