Sequence Risk: Is It Really a Big Deal?

Abstract

Financial planners are keenly aware of, and routinely warn clients about, sequence risk; that is, the possibility of facing a sequence of low returns early in retirement that may force retirees to scale down the plans they had made. This really is a scary scenario, but one that the evidence here shows that retirees are not very likely to encounter. A new and refined definition of sequence risk is advanced in this article, linking this type of risk to the sustainability of a withdrawal strategy. Furthermore, three ways of assessing sequence risk are proposed, among them one that enables a retiree to monitor the sustainability of his withdrawal strategy periodically and to introduce adjustments when necessary. The ultimate message of this article is that retirees should be informed, but not obsess, about sequence risk.

Keywords: Sequence risk, financial planning, retirement planning, withdrawal strategies, 4% rule

JEL Classification: G11