The Lifetime Sequence of Returns: A Retirement Planning Conundrum

Abstract

Individual investors are extremely vulnerable to the sequence of market returns experienced over their investing lifetimes. Individuals who behave exactly the same over their careers, saving the same percentage of the same salary for the same number of years, can otherwise experience very different outcomes based solely upon the specific sequence of investment returns which accompanies their career and retirement. The vulnerability reaches its peak at the retirement date, as this is the point in which a return to employment becomes increasingly difficult and a post-retirement market drop can be devastating. Actual wealth accumulations and sustainable withdrawal rates will vary substantially for different retirees, as these outcomes depend disproportionately on the shorter sequence of returns just before and after the retirement date.