You guide your clients through plenty of risks as they prepare for retirement. After all, retirement is a long game that has many parts to manage, such as taxes, health care costs, inflation, and market risk. When it comes to investing, it’s understood that actual returns will vary significantly from year to year depending on what the market does. We often make assumptions for average rates of return to help plan and prepare our clients for their best chance at a successful retirement.
Risk Before and After Retirement: A Fragile Decade & Sequence of Returns Risk
But there is one often-overlooked risk that retirees face just before and after retirement that has the potential to make or break their standard of living in retirement. Sequence-of-returns risk, or sequence risk, is the risk that an investor will experience negative portfolio returns in years leading up to their retirement, or soon after they retire. It’s a significant risk because they often have little time to make up for losses that are compounded by the simultaneous drawdown of income distributions.
What happens in the market shortly before and after retirement – a very “fragile decade”– is more important than you might think and should be an integral focus of your retirement income practice. Years of hard work and sacrifice can derail your clients’ retirement plan if they retire right before or during a market downturn, as it can quickly deplete their main source of income, making it difficult to recover.
Why Timing Matters the Most for Sequence of Return Risk
With sequence risk, the “when” matters the most. For example, if your clients have a longer time horizon to retirement, shorter-term returns are not as important. Despite ups and downs from year to year, what really affects your clients’ results is typically the long-term average over time. In fact, if they invest a lump sum in a fund and don’t make any additions or withdrawals, the total returns they ultimately earn will be the same regardless of the specific order of returns from year to year.
But if the markets are declining as your clients retire and begin taking income, the value of the portfolio reflects both poor market performance and cash outflows, which can be a double whammy during extended market downturns. A market decline early in retirement, particularly if it’s paired with rising inflation, can have a huge effect on how long a nest egg can sustain a retiree.
Two Agent/Advisor Steps to Mitigate Risk
There is no way to fully mitigate risk for your client however, you can take a few steps for pre-retirees and retires to help prepare your clients for this very possibility. First starts with education and the second is integrating a fixed income asset protection.
- Educating your clients on sequence risk and implementing the appropriate strategies into their portfolio can help your clients avoid this potentially life-changing scenario.
- Adding a healthy stake in fixed-income vehicles is one of the best ways to mitigate sequence of returns risk, protecting a portion of their assets from the whims of the markets. In addition to a comfortable emergency fund, which can provide income during market downturns, fixed insurance products can provide the principal protection and guaranteed income streams they can rely on to cover their expenses until the markets recover.
Want to learn more? The Advanced Markets team at DMI has created a number of resources on sequence of returns risk and Retirement Income Protection on our DMI University website with curated resources for you to share with clients.
Introduce your clients to DMI’s Sequence of Returns Risk by using our easy-to understand consumer brochure, created exclusively for DMI producers. This brochure explains the concept in simple, easy to understand language with full-color charts and graphs to help clients understand this crucial risk to their retirement. Request Sequence of Returns Sales Ideas and Branded Collateral.
And as additional bonus, for qualifying DMI agents, we offer a turnkey Lead-Generating Webinar or a Seminar Workshop Program that includes PowerPoint slides, presentation notes that explores sequence of returns as well as a complete suite of Marketing Services to help build your business.