The sequence of returns impacts investors when they are either adding to or withdrawing money from their retirement portfolio, which can create risk depending on the sequence and the market conditions at the time. If an investor is not doing either, then there is no sequence of returns risk.
Planning your Sequence of Returns
However, if an investor is drawing down their portfolio and not contributing new capital, there is the risk that the timing of withdrawals will negatively impact the overall rate of return available to the investor. The sequence of the withdraws is critical to the retirement portfolio lasting the investor’s lifetime:
- Timing is everything- the timing of the withdrawals can damage the overall return and the portfolio that may not be recoverable.
- Withdrawals during a bear market are more damaging than during a bull market
- If a bear market lasts more than a few months, each withdrawal is not being offset by contributions, leaving the portfolio unable to recover what was withdrawn despite future gains.
- Market sensitive investments have the potential to be impacted by a sequence of return risk
- Diversified portfolios are less likely to be impacted by a sequence of return risk
Planning For the Sequence of Returns Risk
There is no way to protect against the sequence of returns risk but planning for it is important. One way is by including asset protected products such as fixed-indexed annuities in your retirement portfolio:
- Your principal is protected during a down market. Your accumulation does not deplete.
- The accumulation grows on a tax-deferred basis.
- The return is based on an index (ex. The S&P 500), which grows the annuity’s value over time.
- Provide a guaranteed lifetime income and protection against longevity risk; you receive annuity payments for life.
Additional recommendations to protect against sequence of returns risk:
- Continue working beyond regular retirement age and continue to contribute to your retirement savings.
- Maximize your retirement portfolio contributions to create a sequence of returns risk withdrawal buffer.
If you have a concern that your retirement portfolio may be at risk for sequence of returns risk, reach out to our office anytime.
An annuity is intended to be a long-term, tax-deferred retirement vehicle. Earnings are taxable as ordinary income when distributed, and if withdrawn before age 59½, may be subject to a 10% federal tax penalty. If the annuity will fund an IRA or other tax-qualified plan, the tax deferral feature offers no additional value. Qualified distributions from a Roth IRA are generally excluded from gross income, but taxes and penalties may apply to non-qualified distributions. Consult a tax advisor for specific information. Fixed Index Annuities are designed to meet long-term needs for retirement income, and they provide guarantees against the loss of principal and credited interest, and offer the reassurance of a death benefit for your beneficiaries. The interest credited is limited by either placing a cap on the amount of interest that can be earned (“cap” rate) and/or requiring a specified rate that must be surpassed within the index before interest will be credited (“spread rate”).
The interest credited on your contract may be affected by the performance of an external index. However, your contract does not directly participate in the index or any equity or fixed interest investments. You are not buying shares in an index. The index value does not include the dividends paid on equity investments underlying the equity index or the interest paid on any fixed-income investments underlying any bond index. These dividends and interest are not reflected in the interest credited to your contract. Interest, if any, will vary depending upon the allocation option you choose. Choosing several allocation options (“diversifying”) does not ensure that interest will be credited. No allocation option provides the most interest in all market scenarios.
Ronald A. Bartlett & Associates, LTD. are Registered Investment Advisors and has been working with the Communication Workers of America since 2007. At Ronald A. Bartlett & Associates, we know that it is your retirement, and you should have control over it. We offer our experience and knowledge to help you design a custom strategy for financial independence. Contact us today to schedule an introductory meeting!
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