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Financial articles warn about sequence of return risk early in retirement. A retiree who experiences a poor stock market early in retirement has a lower portfolio to withdraw from going forward potentially putting their retirement finances in jeopardy. Someone who experiences a down market later in retirement is at less risk of poor returns affecting their financial security as they have less years that they have to fund expenses.
My question is does anyone really know when they are past this danger zone? And if they are past the danger what criteria do they use to determine that?
It depends entirely on how your finances are structured. Yes, if you are relying solely on SS plus withdrawing from a traditional retirement account, there is a risk. But there are many other types of retirement income you might have.
I have been retired for ten years, and I have been living on SS plus dividends and interest from a taxable brokerage account, so I’m not really at risk. Other retirees might have a pension, an annuity, or income from rentals.
I’m glad to report the results are in!
After reading an article by Jeff Ptak on 1/24/25 on the Morningstar website I posed this same question to him as well.
Well on Wednesday this article appeared
https://www.morningstar.com/retirement/how-avoid-outliving-your-retirement-savings-its-all-sequence?utm_source=eloqua&utm_medium=email&utm_campaign=MorningDigest&utm_content=None_61700&utm_id=31953
Morningstar’s researchers determined the following:
The study started with assuming an all-equity portfolio, with a 3.1% starting spending rate for retirees making fixed real withdrawals each year from an investment portfolio (assuming a 90% probability of having funds remaining at the end of an assumed 30-year retirement period).
There was a far higher risk of exhausting retirement savings when returns were poor in the first five years.
If you made it through the first five years of retirement with investment gains, there was only about a 1 in 25 chance you’d subsequently deplete your savings before reaching the end of retirement, assuming you stuck with the system of fixed real withdrawals. Even after one year of retirement, a gain cut your risk of failure in half.
If losses occurred at any point in those first five years, the risk of failure shrank to about 1% by year 10 of retirement.
I reread the Morningstar article this morning and noted they made a correction:
Correction: A previous version of this article stated that the risk of outliving retirement savings after avoiding losses in the first five years was about 1% by year 10 of retirement. This has been corrected to year 15 of retirement.
It’s great to hear that now that I’m more than 5 years out from retirement, the risk of depletion is only 1 in 25! And kudos to you, David, for being the catalyst to this interesting study and article in Morningstar!