Financial Planning

Overcoming the Hidden Retirement Risk

Overcoming the Hidden Retirement Risk

According to the old adage, timing is everything. And that’s especially true when it comes to ensuring that your retirement savings last a lifetime. Most investors are well aware of retirement concerns such as longevity risk (the risk associated with longer life expectancies requiring greater retirement savings levels) and inflation risk (the risk that the cost of goods and services such as healthcare expenses will significantly outpace investment returns). But very few realize the importance that sequence of returns risk may have on their ability to enjoy a successful retirement.

Sequence of returns risk refers to the devastating impact that negative market performance during the first few years of your retirement can have on the amount of retirement income your portfolio will ultimately generate. In fact, the order in which your portfolio returns occur as you enter retirement and begin drawing income from your investments is often more critical than the average returns you’re making on your investments.

As you are accumulating wealth, it’s only the average (not the order) of your annual returns that matters. Take two identical $1 million portfolios that are allowed to grow without taking any distributions. Assume that they both post identical 5.2% average annual returns over the course of a decade, but that those returns occur in a reverse order:

Accumulation without Withdrawals

Regardless of the sequence of returns, both portfolios end up being worth the same amount. Yet markedly different results occur if you start taking annual 5% income distributions from those same two portfolios. Just a few years of negative returns early on in retirement can devastate a portfolio’s ability to generate lifetime income, and can make the difference between comfort and struggle.

While strong early returns help buoy and stretch the first portfolio (allowing a decade of withdrawals and still increasing its value), early negative returns create a snowballing effect, reducing the second portfolio’s value so much that later positive returns have a far less positive impact.

How should you help protect yourself?

For most of you nearing retirement, the past half dozen years have been good ones. You’ve been successfully building your wealth, so why get overly conservative now? Perhaps that’s the same question that those who were nearing retirement a decade ago were asking themselves – just before the 2008-2009 crisis. Today, many of those retirees are still struggling with the devastating impact the market correction had on their total wealth picture.

Your SunTrust advisor can work with you to evaluate, monitor and explore a host of strategies that may help mitigate potential sequence of returns risk. While no one can predict how the market will behave in the pivotal early years of their retirement, there are a number of more conservative investment strategies such as bond laddering, which when combined with effective asset allocation and carefully planned retirement spending rates, could significantly limit sequence of return risk.1

For more information about retirement, investing, and financial planning, consult with a SunTrust Investment Services Financial Advisor or learn more how SunTrust can help you with your retirement and investments needs.

Asset Allocation does not ensure a profit or guarantee against loss. Investing in the bond market is subject to certain risks, including market, interest rate, issuer and inflation risk; investments may be worth more or less than the original cost when redeemed.  The value of most bond strategies and fixed income securities are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and more volatile than securities with shorter durations; bond prices generally fall as interest rates rise, and values rise when interest rates decline.

This content does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.


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