The sequence of returns involves the order in which investment returns occur and the impact those returns have on people who are nearing retirement or who are already retired.

The sequence of returns risk has no impact on the final portfolio value when you are in the accumulation (savings) period. However, the sequence of returns can have a critical impact on your account value when you are withdrawing money due to the compounding effect on the annual account balances and annual withdrawals.

Let me give you an example of the risk connected to the Sequence of Returns: Scenario #1 has an account value of $500,000 on January 1, 1990. Over the next ten years, the S&P 500 had an average annual rate of return of 10% (which is not realistic and only used for this example).

In this scenario, the family withdrew $30,000 per year during those ten years, with the account value ending as of December 31, 1999, and would have been worth an amazing $770,936.

However, using the same scenario but changing the dates to January 1, 2000, through December 31, 2009, having the S&P losing an average annual rate of return of -2.73% for the ten-year period, the account value at the end of the ten-year period would only be worth $120,654. Do you see the problem? 

You need to manage your RISK! Your account should never be exposed to losing money!

The following chart does a really good job of explaining the Sequence of Returns. Please spend some time understanding this concept. Compounding can work for and against your family.

Tommy L. Ruff, CLU© ChFC©
Strategic Financial Consultant