Investing in the stock market or any other investment vehicle involves a certain degree of risk. One risk that investors must be aware of is the sequence of returns risk. This type of risk occurs when the order in which returns are received affects the overall performance of an investment portfolio. This guide will explore the sequence of returns risk and its implications for investors.
- What Is The Sequence Of Returns Risk?
- How Does the Sequence of Returns Risk Impact Investors?
- How To Manage The Sequence Of Returns Risk
- Prevent Sequence of Returns Risk With Annuities
- How Fixed Index Annuities Protect Against Sequence Of Returns
- Next Steps
- Frequently Asked Questions
- Related Reading
- Request A Quote
What Is The Sequence Of Returns Risk?
The sequence of returns risk refers to the impact of the order and timing of investment returns on an investor’s portfolio. Simply put, it refers to the risk that the returns on your investments will come at the wrong time and hurt your financial goals.
For example, consider two investors who invested $100,000 in the stock market. Investor A experienced a return of 10% in their first year, while Investor B experienced a return of -10% in their first year. Despite both investors experiencing the same average return over time, their returns’ timing can significantly impact their portfolios.
How Does the Sequence of Returns Risk Impact Investors?
The impact of the sequence of returns risk on investors can be significant. For example, a period of negative returns early in an investment timeline can significantly impact the overall performance of an investment portfolio, potentially reducing the number of funds available for future withdrawals.
This can be incredibly challenging for retirees and others relying on their investment portfolio to provide a steady income stream. In addition, a period of negative returns early in the investment timeline can also increase the likelihood that an investor will need to sell securities at a loss, further reducing the value of their portfolio.
How To Manage The Sequence Of Returns Risk
Fortunately, there are several steps that you can take to manage the sequence of returns risk and protect your investments:
- Diversify your portfolio: Diversifying your investments can help reduce the impact of the sequence of returns risk. Investing in various assets can reduce the impact of any single investment on your portfolio.
- Consider annuities: Annuities can provide a guaranteed stream of income, which can help protect against the impact of negative returns.
- Consider a phased retirement approach: A phased retirement approach can help manage the sequence of returns risk by gradually reducing your exposure to the stock market over time.
- Consider a bucket strategy: A bucket strategy involves dividing your portfolio into different “buckets” of investments, each designed to provide a different type of return. This can help protect against the impact of negative returns.
- Work with a financial advisor: A financial advisor can help you understand the sequence of returns risk and develop a strategy to manage it.
Prevent Sequence of Returns Risk With Annuities
The sequence of returns risk can significantly impact your retirement nest egg’s ability to provide income for as long as you live. But there are strategies you can use to help minimize the potential impact that sequence of returns can have on your retirement.
One option is through the use of a Fixed Index Annuity. These long-term retirement income vehicles offer tax-deferred growth potential and guaranteed income for life. In addition, there are options based on when income is needed or how early you start planning for retirement income.
Fixed index annuities also protect your retirement savings from stock market volatility and guarantee an income stream for one or two lifetimes (spouses).
Contact us for what strategies may be appropriate for your retirement, and never worry about running out of money for you and your loved ones.
How Fixed Index Annuities Protect Against Sequence Of Returns
A fixed index annuity allows interest to be credited based partly on the success of specific indices, such as the S&P 500, without the danger of premium loss due to market fluctuations.
Annual Reset Feature
An annual reset feature locks in interest credits annually, which means gains cannot be lost due to stock market decreases.
This feature aids in developing and protecting your retirement funds, as it prevents them from decaying in value during market downturns. The new starting point for future growth calculations will be the lower index level, not the higher one.
An Income For The Rest Of Your Life
Fixed index annuities are designed to provide an income for life after the annuity runs out of money. They’re an insurance policy for your retirement income.
We compare FIAs to other popular retirement planning alternatives and find that it is at the lowest end of the risk spectrum. As a result, premiums cannot be lost due to a market decline.
Adding a fixed index annuity to a retirement portfolio may be beneficial since it protects from market downturns and growth potential and complements other portfolios on the higher end of the risk spectrum.
Next Steps
The sequence of returns risk is a common problem for retirees with saving, spending, and managing money before and during retirement. Hopefully, this guide has educated you on the types of risks associated with the Sequence of Returns, how to calculate it, and some solutions to mitigate its effects. If you have any further questions or want to discuss your specific situation, please don’t hesitate to contact us. We would happily provide you with a free quote tailored to your needs.
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Frequently Asked Questions
What is the sequence of return risk?
The sequence of return risk is the risk that the order in which returns are received can affect the overall performance of an investment portfolio.
How does the sequence of return risk impact investors?
The impact of the sequence of return risk on investors can be significant. For example, a period of negative returns early in an investment timeline can significantly impact the overall performance of an investment portfolio, potentially reducing the number of funds available for future withdrawals.
How can investors mitigate the sequence of return risk?
Investors can mitigate the sequence of return risk by diversifying their portfolio, building a cash reserve, delaying withdrawals, and regularly rebalancing their portfolio.
How can I manage the sequence of returns risk?
You can take several steps to manage the sequence of returns risk, including diversifying your portfolio, considering annuities, and working with a financial advisor.