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Sequence of Returns - How It Could Affect Your Retirement Plan
Episode 2561st April 2024 • Secure Your Retirement • Secure Your Retirement
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In this Episode of the Secure Your Retirement Podcast, Radon and Murs discuss the impact of the sequence of returns on your retirement plan. The sequence of returns is the risk associated with how your money makes or loses money, and it can significantly impact your retirement plan.

Listen in to learn the importance of having income safety and growth buckets to make your retirement smoother and reliable and give yourself peace of mind. You will also learn how the sequence of returns can positively and negatively impact your retirement investments and overall plan.

In this episode, find out:

●     The three money buckets to set up your retirement plan to avoid the effects of the sequence of returns.

●     Sequence of return – risk associated with the positives and negatives of the sequence of your returns as you get closer to retirement age.

●     The most ideal and not-so-ideal ways to walk into retirement and how the latter can affect your retirement plan.

●     The importance of having income safety and growth buckets to dramatically reduce the risk of the sequence of your returns.

●     Two scenarios to help you understand how the sequence of returns can positively and negatively impact your retirement investments.

Tweetable Quotes:

●     “The sequence of return, particularly when we’re close to retirement or already retired, is going to have a significant impact on our withdrawal strategy and ultimately our peace of mind.”- Murs Tariq

●     "If you enter your retirement phase amidst a market downturn but refrain from withdrawing funds, you can afford the opportunity for it to rebound, a far less significant impact compared to withdrawing from your account during the downturn."- Radon Stancil


If you are in or nearing retirement and you want to gain clarity on what questions you should be asking, learn what the biggest retirement myths are, and identify what you can do to achieve peace of mind for your retirement, get started today by requesting our complimentary video course, Four Steps to Secure Your Retirement!

To access the course, simply visit


Radon Stancil:

Welcome everyone to Secure Your Retirement podcast. Today we have a topic that is a very big topic. It could make a lot of difference in how our money lasts in retirement, and it's really all around this idea of what we are calling sequence of returns.

Now, we're going to define that, really help you think that through, but we want to bring you back, maybe if you've been listening to the podcast, to kind of our approach of how we think assets should be set up, so that we would not be affected negatively with this idea of sequence of returns. Because when we get into this, you're going to see that it's significant. It could be significant.

All right, so let's just talk about our premise of how we think money ought to be set up, and it's simplistic in its approach. It's not complicated. But the idea of what Murs and I, in our firm, what we really teach our clients, is that if you think about setting your money up into three bucket types... So, think about, I've got all my retirement money. It could be money that's in a brokerage account, it could be money in the bank, it could be money in my retirement, 401k plans, IRAs, Roth’s. None of that matters about that part of the classification in this part of the conversation.

But what we're going to say is that if we have these three buckets, bucket A, bucket one, would be cash in the bank. That's easy to get to. Kind of think about it like emergency money. Now when we come about the amount that should go in there, that's personal. We've got some clients who want a lot more, some clients who want a lot less. That has really nothing to do with our overall process of how we're going to deal with retirement, other than really just it makes me feel good. Maybe I'm going to make a purchase. I know I'm getting a car. I know I'm going to do something at the house. And so, I want to have cash over there to do that.

The next two buckets are very key. Bucket number two is what we call our income and safety bucket. So, just think about it. It is going to provide me income in retirement, and I want it to be safe. Or think about it this way, non-correlated to the stock market's risk, meaning it cannot go down if the market goes down.

And then that brings us to our third bucket. And then, third bucket is what we call our growth bucket. And in that growth bucket, we're going to have equities, like stocks, we could have some bond-type instruments, we've talked about structured notes. While some of these things have more risk than others, they all have risk. They all have downside potential risk. And so, that part of the bucket, we want to make sure that we are able to keep it in place.

Now, that brings us back to this topic of sequence of returns. And if we say sequence of returns, what does that mean? So, Murs, can you... First of all, before we get into some of the intricacies of this, what are we talking about when we talk about sequence of returns?

Murs Tariq:

Yeah. And I think the big thing to understand is that this is a risk that we have to factor in when we are building out our retirement investment strategies. Just like you can have company risk when you're buying individual stocks, you got to be concerned about how the company is operating. Or in an election year, people think about legislative risk, and all these different things.

Well, sequence of returns is another risk that we pay a lot of attention to. So, just think of the words sequence and returns. What that means is, over years, when you're talking to your friends, or I don't know if you talk to your friends about your returns, but a lot of times we think of returns in calendar year cycles. How much did we make or lose in '23 or in '22 in the calendar year?

ll of your numbers from, say,:

And the risk that comes in, or why it's a risk, is because the sequence in which we get those returns, when did we get the positives, when did we get the negatives, particularly when we are close to retirement or already retired, is going to have a significant impact on our withdrawal strategy, and ultimately our peace of mind.

u have probably experienced a:

But as you approach retirement, and you've only got a couple years ahead of you of earnings, or you are retired and you're actually drawing on your assets, the sequence of how your money makes money or loses money is going to impact your plan significantly.

had here in the recent years.:

So, the most ideal way, and there's no way to plan this out, you can't predict what the markets are going to be, but the most ideal way is to walk into retirement and have growth years before you have any issues in the market. Which would make, obviously, the not so ideal is walking into retirement and running into a scenario like a 2022 calendar year. In 2022, the S&P lost right around 20% in the calendar year. The Nasdaq was down around 30%.

ine that you just came off of:

But you're now retired, and you only maybe have social security coming in, but you need to draw on your assets to get your cash flow. And maybe you're drawing $2,000 or $3,000 or $5,000 a month, as your balances are dropping every single month on the month. That's where we start to see a snowballing issue on our balances, and it makes it very difficult to recover. We're not saving into this bucket anymore, we're actually just drawing on it. We're relying on returns to keep us afloat.

So, that is the concept of what sequence of returns risk is, and it's something that with the strategy that Radon was talking about, having a safety bucket and having a growth bucket, they both have a purpose as to why we use them. And in conjunction together, we can avoid, not completely avoid, but we can dramatically reduce the risk that sequence of returns risk can bring to the table if we don't have a plan in place.

Radon Stancil:

So, I want to just make sure that we're kind of on the same page here. So, when Murs talks about walking into retirement, obviously the key there is, most times when people think about walking into retirement, they're taking income from an account, meaning they've saved and now they need income. So, where this real dilemma comes into play is if I am taking money from the account.

So, let's think about walk into retirement years, and the market's down a little bit, but I don't have to take any money out of the account. I can allow it to recover. That's way less impactful than if I'm taking money from the account. We talk a lot about the fact that if a person, if you lose money, it takes more money to make it back. So, that is without withdrawals, by the way. So, if I lose 20%, I've got to make 25% to break even, but that's without withdrawals.

So, if I'm taking money out of the account, it can really, really make it suffer. So, what I want is, if I can have that bucket set up so that it does not need to have withdrawals from it, that's the key word there, need to have withdrawals from it, we can then strategically take withdrawals. But we have our income safety bucket set up to feed our income.

So, if you take most of our clients, they're going to get all the income they need from the income safety bucket. Growth bucket, we're not touching for a while. As the growth bucket grows, then we take money from the growth bucket and we replenish the income bucket, and that's how that works. Over every few years, we can just take money off of the growth bucket, replenish the income bucket. But I think it would be kind of a nice little exercise, Murs, if you could kind of take the person through this idea.

You walk into retirement, as you say, and we're going to pretend in this case that you are going to take money from the growth bucket, just so you can see the impact. You don't have an income safety bucket. You just go, "I'm putting all my money in growth. That's where I'm going to live." And we're going to look at two scenarios of that, and let you understand the impact of those two scenarios.

Murs Tariq:

Yeah. And so I'm going to try to visually talk you through a chart that I pulled that I think makes a really compelling argument on this idea of sequence of returns risk, and the risk if you don't have a plan to mitigate that type of risk.

And so, example one. In both scenarios, what we're talking about is just $100,000 in an investment account, and in both scenarios we're having to withdraw out of this investment account $5,000 a year. So, not a substantial withdrawal, but $5,000 a year coming out of a $100,000 account, that's about a 5% withdrawal rate.

And we're going to assume returns. Now, here's how we're going to assume returns. One side, what I talked about earlier, the ideal is, we walk into an upmarket as we walk into retirement. The other side, we're going to be walking into a down-market as we enter retirement. And here's the key. That when we take the returns over a 15-year period, both sides, the upmarket return, and the down-market return, when we add up all the returns that are earned on this $100,000 account, when we add them up and divide it by 15, on both sides the average is the same. The average is a 4% rate of return.

The 4% doesn't really mean too much here, but what I'm trying to illustrate is, both sides made these exact same average rate of return, right? So, you're saying, "Well, if they return the same, how could there be an issue here?" Well, the issue is when, or when was the sequence of returns? So, I'll give you-

Radon Stancil:

And key here, there was taking out withdrawals.

Murs Tariq:

Taking out withdrawals, yep. So, taking out $5,000 a year.

So, let's go with the more positive one. Let's start with the beginning of an upmarket type of retirement. And the $100,000 grows. It says it earns 8%. And we also take out $5,000. So now the $100,000 is $103,000 at the end of the day. So, some growth minus our withdrawals, we're at $103,000.

Again it happens, and it earns 11%. Then it earns 18%. Then it earns 14% and 12% and 9% and 11%, and eventually it starts to earn some negative numbers as well. So, this category, where it is front-loaded on positive returns at the beginnings of the years, and we're still, every single year, taking $5,000 a year out of the account.

On the flip side, the returns, how we're going to sequence them is, well, what if we walk in and we don't have a positive 8 or positive 11 or 18 or 14? We actually walk into retirement and we walk into a -5%, a -6%, a -15%, a -8%, a -4%, so we're looking at five years of negative returns before we start to get positive returns. And then we get plus 5%, plus 7%, 9%, 11%, 9%. So, very good returns on the second half of this retirement, 15 year look. Right?

Again, I'll remind you, when we look at the average rate of return in both cases, the average rate of return is exactly the same. The key difference here is, when do we get the good ones and when do we get the bad ones? And so, the $100,000, I'll just give you the starting number and the ending number.

On the good scenario, walking into retirement, walking into a good up market, we start with $100,000, we're taking out $5,000 a year, and we're also earning some money along the way.

By year 15, the $100,000, the ending balance is now $105,944. So, we've actually grown our balance as we were withdrawing on the money, and so pretty good scenario there. No one's going to be upset with that. I've been able to withdraw what I need, I preserved my capital, and actually grew the capital a bit over a 15-year period.

The other scenario is, we walk into retirement with that down market cycle first before we get the good years. Again, same thing. We're going to start at $100,000. We're taking out $5,000 a year for 15 years. And in this case, where we have the first five years of negative returns, we don't have $105,000 left over like we did in the other scenario, we're actually down to $35,889 at the end of year 15. That is where we could start to get stressed out. That is where a retirement plan could potentially have some significant issues. That is where we may have to start looking at changing our retirement plan altogether, and we see that along the way.

But what I want you to understand here is that there's not a big difference from scenario A to scenario B. The returns are the returns, the average is exactly the same, the withdrawals are the same, the dollar amounts are the same. The key difference is that when do we get our returns? When do we get positives, when do we get negatives?

And here's what we know about the stock market. We don't really know when we're going to get them, right? Over time, we know averages are pretty good, but the stock market doesn't care which year you retire in. And so, that's why we fully do believe that we need to have a strategy that mitigates this risk. That safety bucket, while it's not going to earn 20% market-like returns, it's going to do a couple things in serving its purpose to provide safety.

Also, it's going to earn money, but the big piece here is that it's going to be able to provide us predictability and a way to withdraw on our money to as we're not worried about, "Hey, what did the stock market do this year, because I need that return to fund my retirement?" So, it makes everything a lot smoother and a lot more reliable, and ultimately what we call peace of mind.

Radon Stancil:

All right. Well, we hope that that gives you something to think about. But if you're listening to this and you think, I really want to understand this better, because obviously you had to listen to this, and it might be hard to visualize it.

There's two things. One is that we do have a blog written on this, so you can go to the website, go to the blog page. But you just might want to talk, and you can do that as well. You can give us a call. Go to our website, top right-hand corner, click on "schedule call." Our schedule comes right up, and you can schedule a 15-minute call just to talk about it, ask questions, understand what you're listening to, and say, "Hey, how does this work? How would this apply in my situation?" We would be glad to have that conversation with you. We hope this has been helpful. As always, we look forward to talking to you again next Monday.



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