Is sequence risk really a big deal for retirees?

This is big news, since this kind of risk has received outsize attention in recent years from financial planners . Some commentators have even deemed it to be the biggest single risk faced by retirees and soon-to-be retirees.Sequence risk, of course, refers to the possibility of running out of money in retirement because of the order in which the markets’ best and worst years occur.

To illustrate both the existence of sequence risk and how it’s exaggerated, imagine that the stock market’s return in each year of your retirement will be equal to what it actually was in any calendar year picked at random from all years since 1900. Imagine further that you utilize a standard 4% withdrawal strategy.On the one hand, Estrada concedes, it’s theoretically possible in this scenario that you will run out of money less than 10 years into retirement.

But no actual 30-year period in U.S. stock market history has ever begun with an annualized real loss of anything close to minus 11.0%. In fact, the worst actual 10-year performance for the stock market since 1900 was a loss of 4.4% annualized—which occurred from 1911 through 1920, the decade that encompassed World War I. While certainly not great, that’s a lot better than minus 11.0% annualized.

Estrada concludes: “Rational individuals consider both the impact of an event and the probability of its occurrence; hence advisers that highlight the dangers of sequence risk but do not discuss its probability of occurring are not really helping retirees.”In any case, notice that the already-low failure rate assumed in these simulations assume a constant inflation-adjusted withdrawal from your retirement portfolio each and every year.

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