Sequence of Returns: The Financial Risk Rarely Discussed

You’ve heard of financial risks when it comes to investments, but there is one really damaging risk that you need to know about.  Stephen Smith with Symphony Financial Group explains one risk that is often not discussed.

This risk is called Sequence of Returns.  It affects people who are going to start making withdrawals for income from their life savings.  Sequence risk is drawing a percentage for income, and experiencing losses along the way.

For example, there are two gentlemen and the first retires in 1996 and the second retires in 1999.  They both use the same exact strategy and both have a million dollars saved up for retirement.  They will both be withdrawing four percent of their nest egg or $40,000 each year and are planning to add a three percent each year for inflation.  The only difference in the two plans is the year that they retire.

By the time 2015 rolls around, the first gentleman is withdrawing $75,000 per year in income.  The second gentleman who retired 3 years later is withdrawing $65,000 per year.

Over a period of time, the first gentleman had good growth in the beginning of his retirement while withdrawing income.  The second gentleman had one good year and then got hammered with a downturn in the market.

He cannot keep withdrawing this much money and he’s going to have to go back to work.  This is called sequence risk and it could destroy your retirement plans.

To find out how you can remove this risk from your retirement plan, call 469-714-4622 or visit symphonyfinancialgroup.com.