Sequence of return risk: Don’t fall prey to the retirement killer

Sequence of return risk: Don’t fall prey to the retirement killer

By Thomas K. Brueckner

Did you know that two investors can average the same return over time, yet one can have nearly twice as much money at age 65 as the other?

Advisors call this sequence of return risk, and it’s a retirement killer.

I remember when, during the early 1990s, major brokerage firms used the results of studies and back testing to demonstrate certain “truths” about the market.

One popular brochure told of how “Wally the Winner” bought $10,000 worth of the S&P 500 on the lowest (best) valuation day of each year for 25 years, while his hapless brother “Larry the Loser” bought the same $10,000 of the index on the highest (worst possible) day of each year.

While one might assume a huge difference after 25 years, the annualized yield of Wally’s portfolio was only 1.2 percent per year higher than Larry’s, proof that time in the market, rather than timing, leads to desirable results.

What the brokerage firm that published this endearing piece didn’t discuss, of course, was the age of the investor, implying that all investors had Wally’s and Larry’s 25-year time horizon, and that as long as one just stayed in the market over time, all would be fine. Tell that to someone who retired at the bottom of the markets in October, 2002, down 51 percent, or in March, 2009, down 57 percent.

More recently, there was another brokerage firm-sponsored study that measured the S&P 500 over the 60 years from 1950 through 2010. It said that $1 invested and left alone to reinvest grew to $52. Ah, but if you missed only the 10 best days in that 60-year investment lifetime, your original dollar grew to $27, nearly half as much.

Their biased conclusion: “None of us knows when one of those 10-best days is going to occur, so rather than missing out on such gains while sitting on the sidelines, one should stay in over the long run so as to catch all of those best days…”

Of course, no mention was made as to what missing the 10 worst days would have done for that dollar in 60 years: It would have grown to $127.

What so many of these misguided studies rarely address is the age of the investor and their stage of life. When one incurs those massive losses in the portfolio has far more to do with a sustainable retirement than any other factor.

Per Investopedia: “It is not just long-term average returns that impact your financial wealth, but the timing of those returns. Two retirees with identical wealth can have entirely different financial outcomes, depending on when they start retirement. A retiree starting out at the bottom of a bear market will have better investing success in retirement than another starting out at a market peak, even if the long-term averages are the same.”

Another consequence of this to a recent retiree who is no longer contributing to his 401(k) from income is that the ability of his portfolio to recover his losses after a big decline becomes greatly diminished, and his risk of outliving his assets will likely increase significantly. Guaranteeing a lifetime income from some of one’s financial assets can help mitigate sequence of returns risk.

Finally, sequence of return risk is rarely discussed by advisors who make their living not by acting as fiduciaries, but from an assets-under-management trail commission, so long as their clients remain fully invested. As regulators are now pointing out, this sometimes creates a conflict of interest between the retiree, who can no longer afford excessive risk on monies it’s taken 40 years to save, and the advisor, whose income is dependent upon the client remaining fully invested in various market holdings.

A recent “Financial Planning’ magazine article found that “advisors have a history of being significantly disconnected from their clients’ actual needs.”

When clients were asked what their top concern was, 88.6 percent said losing their wealth.

When advisors were asked the same question, only 15.4 percent believed that losing their wealth was the most important concern of those clients, virtually the polar opposite of how clients view their needs.

Thomas K. Brueckner, CLTC, is President/CEO of Strategic Asset Conservation in Scottsdale, a conservative wealth-management firm. Reach him at