Sequence of Returns Risk
Background
Sequence of returns risk is the risk that poor market returns early in retirement, while you are already withdrawing money, cause lasting damage to your corpus.
Explanation
Two retirees can have the same average return but different return sequences; the one with early bad years may run out of money first. This happens because selling units at low prices leaves fewer units to recover later. Managing this risk involves holding enough safe assets for near-term expenses and using conservative withdrawal rates.
Example
Retiree A experiences a market crash in the first three years of retirement while withdrawing 4%; retiree B experiences the crash 20 years later. Even if they both average 10% returns over 30 years, A’s portfolio might deplete much earlier.
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