Sequence of Returns Risk
The risk that the timing of investment returns, particularly poor returns early in retirement when withdrawals begin, can significantly reduce the longevity of a retirement portfolio.
Understanding Sequence of Returns Risk
Sequence of returns risk is most dangerous in the first 5-10 years of retirement. Poor returns combined with withdrawals can permanently impair a portfolio even if long-term average returns are acceptable. IUL policies with 0% floors eliminate the sequence of returns risk for the cash value component, as negative market years don't reduce the cash value. This downside protection is particularly valuable for retirement income planning.
Why This Matters for Retirement: Understanding Sequence of Returns Risk is essential for making informed decisions about tax-free retirement income strategies. Whether you are evaluating an IUL policy, planning Roth conversions, or comparing retirement vehicles, this concept directly affects your outcomes.