How Sequence Of Returns Risk Is Upending Retirement Plans

Falling stock and bond prices coupled with higher prices for most goods and services are upending many retirement plans. That’s what happens when sequence of returns risk goes from a possibility to a realized event.

About 48% of people who were planning to retire in 2022 are putting their plans on hold or reconsidering them, according to a recent survey taken by Quicken. Another 22% of people who were planning to retire sometime after 2022 are considering delaying their retirement dates.

A survey by BlackRock BLK found that the number of respondents who believed their retirement plans are on track declined from 68% last year to 63% this year. Another 42% of respondents said their retirement plans were changed by the pandemic.

We’re living through an example of sequence of returns risk and how it can arise quickly and unexpectedly.

Many people build their retirement plans on long-term average financial data or on the assumption that recent performance will continue indefinitely. Events often don’t unfold that way. The long-term average of stock index returns is the result of years of very different returns. It’s a rare year when the return of an index is close to its long-term average. In most years the return of an index is very different from the long-term average.

The indexes also have bull markets and bear markets, which are extended periods when their returns are well below or above the long-term average.

The same pattern is true of inflation.


A retirement plan can easily get off track when the early years of retirement coincide with a bear market in stocks or an inflationary surge. That’s the sequence of returns risk. When the early years of retirement coincide with a bad period of inflation or market returns, it can be difficult to put a retirement plan back on track.

Both stocks and bonds were in long-term bear markets for most of the 1960s and 1970s. In the first edition of my book, The New Rules of Retirement, I discussed a study that found someone who retired in 1968 and didn’t adjust the retirement spending plan would have run out of money about the time the great bull markets in stocks and bonds began in 1982.

That’s an extreme case of sequence of returns risk. People who retired around 2000 had a similar experience.

There’s also a sequence of returns risk with inflation. Spending will be much higher than expected if the plan assumed the long-term inflation rate of 2% to 3% but in the early years of retirement inflation is well above that.

Sequence of returns risk is why it’s a good idea to stress test a plan by looking at different economic assumptions. What happens if stock prices decline by 20% during the 10-year period that includes the five years before and after retirement? How quickly must stocks recover to put the plan back on track? What if inflation spikes and doesn’t recede for several years?

Then, consider actions that can be taken to reduce your sequence of returns risk.

You might decide to reduce stock exposure during the years just before and after retiring. You might move some money into annuities to generate guaranteed lifetime income. Or you could reduce fixed retirement expenses so that you are better able to adapt to changing economic circumstances.

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