PLANADVISER - November/December 2020 - 34
investment-oriented
Sequence of Return Risk
There's more participants should understand than just cutting back on equities
I
n the five or 10 years just prior to a person's retirement,
and the same period afterward, the timing of market
events is crucial due to the phenomenon of sequence of
return risk.
It has been a formal part of defined contribution (DC)
plan adviser thinking for 25 years or so, but was postulated
far earlier: The book of Genesis relates how the Pharaoh of
Egypt had a dream in which seven fat cows were followed by
seven gaunt ones. A servant, Joseph, interpreted the dream
to mean Egypt would enjoy seven prosperous years, but
then be devastated by seven bad years, bringing not only
terrible famine for the moment, but also ruining the future
productive capacity of the land.
So it is in the years around retirement. The markets
might hit a rough patch, and the retiring worker has to
start spending from a depreciated portfolio. Timing of the
returns in, and of the cash flows out, is everything.
A Compounded Problem
At retirement, many participants in defined contribution
plans are likely to be holding their peak assets, and giving
up their means of restoring them through contributions.
" That's the time investment returns are the most impactful, "
notes Neil Lloyd, head of U.S. DC and financial wellness
research for Mercer in Vancouver, British Columbia. " That
leaves investors vulnerable to the markets, and to a bit of
luck as well, as to how the sequence of portfolio returns is
going to work out. "
The problem is compounded by withdrawals: A retiree
might plan to draw 4% per year. But if the markets fall 20%
all of a sudden, that dollar amount of withdrawal becomes
5%, and the asset balance is greatly depleted-throwing up
a challenge to rebuilding the balance through investment
returns and threatening future distributions. As in Pharaoh's
dream, the bad years destroy prospects for the future.
34 | planadviser.com November-December 2020 Art by Maarten Peeters
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PLANADVISER - November/December 2020
Table of Contents for the Digital Edition of PLANADVISER - November/December 2020
Value Judgement
2020 PLANADVISER Practice Benchmarking Survey
Retirement-Plus
Client Onboarding
Expanding Plan Access
Sequence of Return Risk
The DOL's Latest Proposed PTE
Are You a QPAM?
PLANADVISER - November/December 2020 - Cover1
PLANADVISER - November/December 2020 - Cover2
PLANADVISER - November/December 2020 - 1
PLANADVISER - November/December 2020 - 2
PLANADVISER - November/December 2020 - 3
PLANADVISER - November/December 2020 - 4
PLANADVISER - November/December 2020 - 5
PLANADVISER - November/December 2020 - 6
PLANADVISER - November/December 2020 - 7
PLANADVISER - November/December 2020 - 8
PLANADVISER - November/December 2020 - 9
PLANADVISER - November/December 2020 - 10
PLANADVISER - November/December 2020 - 11
PLANADVISER - November/December 2020 - 12
PLANADVISER - November/December 2020 - 13
PLANADVISER - November/December 2020 - Value Judgement
PLANADVISER - November/December 2020 - 15
PLANADVISER - November/December 2020 - 16
PLANADVISER - November/December 2020 - 17
PLANADVISER - November/December 2020 - 2020 PLANADVISER Practice Benchmarking Survey
PLANADVISER - November/December 2020 - 19
PLANADVISER - November/December 2020 - 20
PLANADVISER - November/December 2020 - 21
PLANADVISER - November/December 2020 - 22
PLANADVISER - November/December 2020 - 23
PLANADVISER - November/December 2020 - 24
PLANADVISER - November/December 2020 - 25
PLANADVISER - November/December 2020 - Retirement-Plus
PLANADVISER - November/December 2020 - 27
PLANADVISER - November/December 2020 - 28
PLANADVISER - November/December 2020 - 29
PLANADVISER - November/December 2020 - Client Onboarding
PLANADVISER - November/December 2020 - 31
PLANADVISER - November/December 2020 - Expanding Plan Access
PLANADVISER - November/December 2020 - 33
PLANADVISER - November/December 2020 - Sequence of Return Risk
PLANADVISER - November/December 2020 - 35
PLANADVISER - November/December 2020 - 36
PLANADVISER - November/December 2020 - 37
PLANADVISER - November/December 2020 - The DOL's Latest Proposed PTE
PLANADVISER - November/December 2020 - Are You a QPAM?
PLANADVISER - November/December 2020 - 40
PLANADVISER - November/December 2020 - Cover3
PLANADVISER - November/December 2020 - Cover4
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