When constructing a retirement portfolio and before any investment decisions are ever made, it’s common practice to review and compare the average annual returns of the investments you are considering. Once you have this data, it’s helpful because you get to see how the investments have performed and how they compare to their peers and other options you may be considering.

The impact of this review and comparison on the overall performance of a portfolio can be significant. However, as you near and enter the retirement stage of life, the average annual returns, while still important and necessary to compare, become secondary to the “Sequence of Returns (SOR).” SOR looks at the sequence in which gains, and losses occur during a retirement.

For those who suffer portfolio losses early in retirement, the risk of running out of money is greatly increased.

Here’s An Example Of How The “Sequence Of Returns” Work:

Two Portfolios Showing Sequence of Returns Example

As you can see, the sequence of when gains and losses occur during a retirement have a dramatic impact on the size of a portfolio! In this example, the difference is over $399,000 when you suffer losses early vs. losing later in retirement.

Why is SOR so vital today?  Because, we are currently in a similar position as 2000. Today, the markets are high at the same time as over 76 million Boomers are nearing or already retired. The probability of market declines in the future are greater because the markets are high.  At some point, the record bull market will end before a new one begins. We don’t know what the losses might be, however, planning for them now is essential to live a retirement lifestyle that was planned for.

The differences between those who were crushed during the “Lost Decade” vs. those who thrived was how their portfolios and income streams were constructed. Those who had safer core portfolios along with secure income streams that were not reduced by the markets continued to live their lifestyle. Those who suffered losses both in their portfolio and income streams were forced to change their lifestyle for the worse. Change is the hardest thing for all of us.  However, changing your mindset and portfolio from “working years” to “retirement years” is a requirement.

Here are five portfolio adjustments that you should consider implementing now while the markets are still high:   

  1. Factor the “Sequence Of Returns” into your retirement plan.
  2. Redesign your portfolio from a “working years portfolio” to a “retirement years portfolio.”
  3. Make sure that the income streams you’ll need to live your lifestyle are secure, so even if there are market losses early, you’re still able to live your retirement according to your plan.
  4. Make sure the core portion of your portfolio is secure, so market losses don’t alter your lifestyle.
  5. Eliminate unnecessary fees from your portfolio. Fees can be just as bad as losses.

If you’re nearing or already in retirement, include the “Sequence of Returns” into your planning.  It’s vital that you avoid losses early in your retirement!  Otherwise, the risks of living a reduced lifestyle, or worse, running out of money, are dramatically increased.

This article is part of an ongoing series Retirement Planning Series. Read the next article in the series titled Unnecessary Market Losses Can Be Fatal to Your Retirement.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which products/investment(s) may be appropriate for you, consult with your attorney, accountant, financial advisor or tax advisor prior to investing or taking action.

About the author

Richard Kelly - Certified Senior Advisor in Monument, Colorado
Rick Kelly
Certified Senior Advisor at 800-975-1064

Rick Kelly, CSA is an Independent Certified Senior Advisor with offices in Monument and Littleton, CO.  He helps Boomers and Retirees live healthier retirements by designing safer and more optimal portfolios along with secure retirement income streams.

Rick Kelly, CSA
325 2nd Street, Suite I
Monument, CO 80132