Sequence of Returns

When people retire, typically the most important question that they have is “Have we saved enough?” and “Will we be able to have the kind of retirement that we have dreamed of?” By creating a financial plan for our clients, we help them answer that question. One of the most important risks that we discuss with clients while reviewing the financial plan is the sequence of returns risk.

Joshua P. Mersberger, CFP®, CRPC

Nov. 2nd, 2016

A pen on a piece of paper
A pen on a piece of paper
Sequence of Returns

As our clients' near retirement and transition from the accumulation phase to the distribution phase, one of the most important discussions that we have with them is about the sequence of returns. The sequence of returns refers to the risk of low or negative returns from your investments when you are making withdrawals from those investments. Most people understand that over time markets will trend upwards and returns will be close to their historical averages. The problem is that there are always periods of below-average (or negative) returns and there is no proven way to consistently predict these periods of time. For example, someone who retired in the 1990's during a great bull market has had a very different investment experience than someone who retired in 2008. The sequence of returns becomes especially important when clients are taking income from investments.

At Mersberger Financial Group, we believe that the best way to protect against the sequence of returns risk is to split our investments into multiple strategies.

Short-Term Money

The first strategy is designed for short-term money, which is money that will be spent in the next three years. This portfolio is designed to have zero exposure to the stock market and is focused on generating dividends and interest income. The main idea is that this portfolio should generate some growth, but it should still be relatively immune to a large market decline (think 2008).

Moderate Risk

The second investment strategy is designed for money that may be spent in three to seven years. Here we can afford to take some market risk as the portfolio has longer to recover if the market drops. However, we still want to stay around a moderate risk to again protect against a large market decline.

Buy and Hold Strategy

The third investment strategy is designed for money that has a seven-year plus time horizon. Here our suggestion is to allocate 100% to the market as historically this has lead to the best returns over time and we have time for the portfolio to potentially recover in the event of a market drop. Typically, this means a "buy and hold" strategy that rides out both the good and the bad of the market.

Your Plan

Each and every client has a different situation and a different risk tolerance, so everyone's overall allocation will vary. The important is to ensure that you have a plan in place and that you stick to it through good times and bad.

Please contact our office if you have any questions regarding this topic.

Mersberger Expertise

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