The Overlooked Risk to a Secure Retirement

Salvatore M. Capizzi,Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

Advisors can help retirees mitigate sequence risk – and successfully navigate market swings.

Navigating the landscape of portfolio risk is critical for clients to obtain financial success. We are familiar with common risks that may affect client portfolios: market, credit, liquidity, economic and geopolitical risk, all of which can be hurdles to achieve your clients’ portfolio objectives.

But there is one often-overlooked risk – sequence risk – that can significantly threaten your clients’ retirement savings. Sequence risk refers to the threat of going broke due to the timing of market fluctuation during the withdrawal phase of your clients’ retirement investments.

It is driven by the order in which investment returns occur and can significantly impact portfolio outcomes, especially for retirees. Experiencing poor market performance early in retirement makes it challenging to maintain income sustainability, even if the market recovers later, and can deplete your client’s portfolio faster.

One way to illustrate how sequence risk affects your clients’ portfolios, especially for pre-retirees and retirees, is to put an investment spin on one of my favorite bedtime stories as a kid, Aesop’s “The Tortoise and The Hare.”

In my telling, a 65-year-old tortoise tells all her friends in the forest that she will soon retire. Meanwhile, a hare, munching on a carrot while leaning against a tree, overhears the tortoise and loudly proclaims, “I am retiring too, and although we are both starting with $1 million, I should have much more income in retirement than you!”