Why retirees need to heed the ‘sequence-of-returns risk’ in their portfolios

When world markets took a nosedive in the early days of the COVID-19 crisis, many investors worried about the hit they saw on their returns in monthly statements.

Those in the early days of retirement were particularly lucky that the pandemic-driven plummet proved to be short-lived. A prolonged downturn of that magnitude at the start of the period when you’re drawing on investments can have disastrous consequences on your long-term portfolio performance, experts say. Still, there are pre-retirement strategies that can protect you.

Sequence-of-returns risk, also known as sequence risk, is the threat of receiving low or negative returns early in a period when withdrawals are being made. For retirees, it can have a significant impact on the overall value of a portfolio — and how long it lasts.

“When you’re in retirement and you’re spending money, the economy is a lot more important than you think,” says Moshe Milevsky, a finance professor in the Schulich School of Business at York University in Toronto. “All the heavy lifting, all the work is being done by the nest egg, and you want to protect it.”

For example, even though you’re earning an average of 7 per cent over your retirement, if you get negative returns from weaker markets first and then positive returns from stronger markets afterward, it will have a disproportionate impact on how long the funds last.

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