When people think about retirement investing, they usually focus on average returns. If the market earns 7% or 8% per year over time, the thinking goes, everything should work out.
But retirement planning isn’t just about averages. It’s also about when those returns occur.
This is known as sequence of returns risk, and it’s one of the most important—and most misunderstood—risks retirees face.
During your working years, market volatility is often beneficial. When markets fall, you’re buying investments at lower prices through ongoing contributions. Over time, that volatility can actually improve long-term results.
Retirement flips that equation.
Once you begin withdrawing money from your portfolio, early market losses can do lasting damage. If the market declines in the first few years of retirement while you’re also taking withdrawals for income, the portfolio may be forced to sell investments at depressed prices. Those assets are no longer there to participate when markets eventually recover.
Even if long-term returns end up being perfectly normal, the timing of those early losses can significantly reduce how long a portfolio lasts.
This is why two retirees with the same average return over 30 years can end up with very different outcomes depending on the sequence of market performance.
Managing this risk is one reason retirement planning goes far beyond simply choosing investments. A well-designed retirement strategy may include elements such as maintaining a cash reserve for near-term spending, adjusting withdrawal strategies during market downturns, and structuring portfolios to balance income needs with long-term growth.
Markets will always be unpredictable. But thoughtful planning can help ensure that short-term volatility doesn’t derail a long-term retirement.
At Hanover Advisors, retirement planning focuses not just on expected returns, but on building resilient strategies designed to navigate the real-world risks retirees face.