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Sequence of Returns

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Sequence of Return Risk
The risk of receiving lower or negative returns early in a period when withdrawals are made from an investment portfolio is known as sequence of return risk. If you are taking withdrawals from your portfolio, the order or the sequence of investment returns can significantly impact your portfolios overall value.
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Consider the following hypothetical investment scenarios for Mr. Green and Mr. Brown:
Mr. Green and Mr. Brown both started with a $1 million investment portfolio at age 65. Both averaged a 6% annual return that grows to the same value after 25 years, but they experience their annual returns in an inverse order from each other. See the chart below demonstrating their different paths to their ending values.
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In this case, the sequence of investment returns had no bearing on portfolio values because the average annual rate of return was the same and no distributions were taken from the account.
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Now let’s look at how the sequence of returns can impact a portfolio when taking distributions:
Mr. Green and Mr. Brown still start with an initial $1 million investment portfolio. But in this example, they start taking 5% withdrawals (of the initial value) beginning immediately at age 65. Mr. Green begins taking withdrawals in an up market, giving him the optimal environment to maintain his portfolio value long-term. Unfortunately for Mr. Brown, he starts taking income in a down market and depletes his entire portfolio before reaching age 83.
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The contents of this website are for educational purposes only. Any material and its attachments, links, downloads, and/or any emails from our company are not intended to provide legal or tax advice. To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal or state tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein. Please seek the advice of appropriately licensed individuals for legal or tax advice relating to your individual situation. Birdseye Financial and its employees are not tax or legal advisors and are not operating in such a manner. Birdseye financial and those working for the company are not licensed Investment Advisors which prohibits us from offering such advice. Any advice you get should be taken as non-investment advice and only educational in nature. Should our clients need a licensed investment advisor, we often work with Secure Investment Management. *Investing carries an inherent element of risk. No strategy can guarantee a profit or prevent a loss. Provided content is for overview and informational purposes only and is not intended and should not be relied upon as individualized tax, legal, fiduciary or investment advice. Any individuals used in scenarios are fictitious and all numeric examples are hypothetical and were used for explanatory purposes only. THANK YOU!
  • Home
  • About
    • Welcome to Birdseye
    • Who We Are
    • Risk & Portfolio Assessment
    • Request Free Consultation
  • Strategies
    • Key Components
    • Sequence of Returns
    • Rule of 100
    • Tax Strategies >
      • Tax Saver Calculator
      • RMD Calculator
      • Qualified Charitable Donation
      • Medicare Tax Deductions
    • Webinars >
      • Economic Strategy Webinar
      • Five Key Areas of Retirement Webinar
    • Video Library
  • Planning
    • Retirement Analysis >
      • Retirement Meeting
      • RA Analysis
    • Social Security >
      • Social Security Webinar
    • Pension Maximization
    • Risk Analysis
    • Risk Investments
    • Secure Investment Management
    • Federal Benefits >
      • Federal Benefit Kit
  • Insurance
    • Annuities
    • Medicare >
      • Medicare Questionnaire
      • Medicare Meeting
      • Medicare Networks
    • Long-Term Care
    • Life Insurance
    • Final Expense
    • Health Insurance
    • Dental Insurance
    • Vision Insurance
  • Tools
    • Financial News Blog
    • Documentaries
    • Market Index Links
    • Required Minimum Dist (RMD Calculator)
    • Calculators
    • Professional Referrals
    • Bankrate Interest Rates
    • Zillow Home Value
  • Contact
    • Free Consultation
    • Schedule Appointment
    • Online Meeting >
      • Online Meeting Details
    • Secure Upload
    • Retirement Analysis
    • Retirement Portal
    • Rate our Service
    • Referral A Friend