RISK
RISK
Sequence of Returns Risk Isn’t Just a Retirement Problem
Sequence of Returns Risk Isn’t Just a Retirement Problem
Sequence of Returns Risk Isn’t Just a Retirement Problem
Most people encounter the phrase “sequence of returns risk” sometime around their 50s, usually when a financial advisor is explaining why the order of market returns matters just as much as the returns themselves. Or — increasingly — they stumble across it on a podcast, in a Reddit thread, or in a Facebook group. There’s genuinely good content out there now. Bogleheads.org alone has more rigorous discussion of retirement planning concepts than most advisors will ever offer their clients. The information is available. That’s real progress.
Most people encounter the phrase “sequence of returns risk” sometime around their 50s, usually when a financial advisor is explaining why the order of market returns matters just as much as the returns themselves. Or — increasingly — they stumble across it on a podcast, in a Reddit thread, or in a Facebook group. There’s genuinely good content out there now. Bogleheads.org alone has more rigorous discussion of retirement planning concepts than most advisors will ever offer their clients. The information is available. That’s real progress.
Most people encounter the phrase “sequence of returns risk” sometime around their 50s, usually when a financial advisor is explaining why the order of market returns matters just as much as the returns themselves. Or — increasingly — they stumble across it on a podcast, in a Reddit thread, or in a Facebook group. There’s genuinely good content out there now. Bogleheads.org alone has more rigorous discussion of retirement planning concepts than most advisors will ever offer their clients. The information is available. That’s real progress.
The classic illustration goes like this: two investors with identical average returns over 30 years can end up with very different outcomes in retirement, depending on whether the bad years came early or late.
The classic illustration goes like this: two investors with identical average returns over 30 years can end up with very different outcomes in retirement, depending on whether the bad years came early or late.
The classic illustration goes like this: two investors with identical average returns over 30 years can end up with very different outcomes in retirement, depending on whether the bad years came early or late.
That’s true. But it’s also incomplete — because it implies that sequence of returns risk is something you only need to worry about once you’re close to the finish line. It isn’t.
That’s true. But it’s also incomplete — because it implies that sequence of returns risk is something you only need to worry about once you’re close to the finish line. It isn’t.
That’s true. But it’s also incomplete — because it implies that sequence of returns risk is something you only need to worry about once you’re close to the finish line. It isn’t.
Your wealth depends not just on what the market does, but on when you’re positioned to participate in it.
Your wealth depends not just on what the market does, but on when you’re positioned to participate in it.
Your wealth depends not just on what the market does, but on when you’re positioned to participate in it.
If the market runs during a period when you can’t save — or worse, when you’re being forced to withdraw — you fall behind in a way that compound returns can never fully repair. Retirement makes this vivid because the math is stark. Retirees who experience a market crash in their first few years of withdrawals can run out of money even if the market fully recovers. The order matters because you’re selling assets to live on. A dollar sold during a downturn is a dollar that isn’t there to capture the recovery.
If the market runs during a period when you can’t save — or worse, when you’re being forced to withdraw — you fall behind in a way that compound returns can never fully repair. Retirement makes this vivid because the math is stark. Retirees who experience a market crash in their first few years of withdrawals can run out of money even if the market fully recovers. The order matters because you’re selling assets to live on. A dollar sold during a downturn is a dollar that isn’t there to capture the recovery.
If the market runs during a period when you can’t save — or worse, when you’re being forced to withdraw — you fall behind in a way that compound returns can never fully repair. Retirement makes this vivid because the math is stark. Retirees who experience a market crash in their first few years of withdrawals can run out of money even if the market fully recovers. The order matters because you’re selling assets to live on. A dollar sold during a downturn is a dollar that isn’t there to capture the recovery.
But the same logic applies, in different forms, throughout your entire working life. Consider two households, both saving diligently, both invested in a broad index fund. One household has peak earnings from 2000 to 2010 — they lived through the dot-com crash and then the financial crisis. The other has peak earnings from 2010 to now. Since March 2009, the S&P 500 is up over 600%.
But the same logic applies, in different forms, throughout your entire working life. Consider two households, both saving diligently, both invested in a broad index fund. One household has peak earnings from 2000 to 2010 — they lived through the dot-com crash and then the financial crisis. The other has peak earnings from 2010 to now. Since March 2009, the S&P 500 is up over 600%.
But the same logic applies, in different forms, throughout your entire working life. Consider two households, both saving diligently, both invested in a broad index fund. One household has peak earnings from 2000 to 2010 — they lived through the dot-com crash and then the financial crisis. The other has peak earnings from 2010 to now. Since March 2009, the S&P 500 is up over 600%.
Everything else being equal, the second household arrives at retirement in a fundamentally different position. Not because they were smarter. Not because they made better investment decisions. Because they were saving more during a period when the market was rising sharply. Compounding did the rest. This isn’t a matter of investment skill. It’s sequence of returns risk — decades before either household retires.
Everything else being equal, the second household arrives at retirement in a fundamentally different position. Not because they were smarter. Not because they made better investment decisions. Because they were saving more during a period when the market was rising sharply. Compounding did the rest. This isn’t a matter of investment skill. It’s sequence of returns risk — decades before either household retires.
Everything else being equal, the second household arrives at retirement in a fundamentally different position. Not because they were smarter. Not because they made better investment decisions. Because they were saving more during a period when the market was rising sharply. Compounding did the rest. This isn’t a matter of investment skill. It’s sequence of returns risk — decades before either household retires.
The timing of contributions shapes the compounding available to a household.
The timing of contributions shapes the compounding available to a household.
How it shows up in real life
How it shows up in real life
How it shows up in real life
Income curtailed by job loss. If you lose your job during a bull market — and can’t replace your savings rate while you’re out of work or underemployed — you miss years of compounding at precisely the moment it’s most powerful. You might recover your income eventually, but you can’t recover those contribution years.
Income curtailed by job loss. If you lose your job during a bull market — and can’t replace your savings rate while you’re out of work or underemployed — you miss years of compounding at precisely the moment it’s most powerful. You might recover your income eventually, but you can’t recover those contribution years.
Income curtailed by job loss. If you lose your job during a bull market — and can’t replace your savings rate while you’re out of work or underemployed — you miss years of compounding at precisely the moment it’s most powerful. You might recover your income eventually, but you can’t recover those contribution years.
Voluntary income reduction. When a two-income household becomes a one-income household — say, because one parent steps back to raise children — the math is the same. The income is partially replaced by something real and meaningful. The savings rate isn’t. And the market doesn’t care about your reasons.
Voluntary income reduction. When a two-income household becomes a one-income household — say, because one parent steps back to raise children — the math is the same. The income is partially replaced by something real and meaningful. The savings rate isn’t. And the market doesn’t care about your reasons.
Voluntary income reduction. When a two-income household becomes a one-income household — say, because one parent steps back to raise children — the math is the same. The income is partially replaced by something real and meaningful. The savings rate isn’t. And the market doesn’t care about your reasons.
I know this one personally. Our son was born in 2013, and I became the stay-at-home parent. I returned to work in 2019, and, as anyone who’s started a business knows, the first few years are rarely profitable. I effectively couldn’t save from 2013 through 2024. Since 2013, the S&P 500 has returned over 539% including dividends. I was on the sideline for most of it. You think that won’t affect my retirement? It absolutely will.
I know this one personally. Our son was born in 2013, and I became the stay-at-home parent. I returned to work in 2019, and, as anyone who’s started a business knows, the first few years are rarely profitable. I effectively couldn’t save from 2013 through 2024. Since 2013, the S&P 500 has returned over 539% including dividends. I was on the sideline for most of it. You think that won’t affect my retirement? It absolutely will.
I know this one personally. Our son was born in 2013, and I became the stay-at-home parent. I returned to work in 2019, and, as anyone who’s started a business knows, the first few years are rarely profitable. I effectively couldn’t save from 2013 through 2024. Since 2013, the S&P 500 has returned over 539% including dividends. I was on the sideline for most of it. You think that won’t affect my retirement? It absolutely will.
Capital pulled out of the market by expenses. A new roof. A parent’s care costs. College tuition. A medical bill. These aren’t investment decisions — they’re life — but they have investment consequences. If they hit during a downturn, you’re selling assets at a loss to cover them. If they hit during a bull run, you’re paying for the expense and forgoing future growth on the dollars that left the portfolio. The timing of the expense determines the damage.
Capital pulled out of the market by expenses. A new roof. A parent’s care costs. College tuition. A medical bill. These aren’t investment decisions — they’re life — but they have investment consequences. If they hit during a downturn, you’re selling assets at a loss to cover them. If they hit during a bull run, you’re paying for the expense and forgoing future growth on the dollars that left the portfolio. The timing of the expense determines the damage.
Capital pulled out of the market by expenses. A new roof. A parent’s care costs. College tuition. A medical bill. These aren’t investment decisions — they’re life — but they have investment consequences. If they hit during a downturn, you’re selling assets at a loss to cover them. If they hit during a bull run, you’re paying for the expense and forgoing future growth on the dollars that left the portfolio. The timing of the expense determines the damage.
Financial events can interrupt saving or require liquidity at moments that the market does not choose for you.
Financial events can interrupt saving or require liquidity at moments that the market does not choose for you.
What this has to do with Asset Life Matching
What this has to do with Asset Life Matching
What this has to do with Asset Life Matching
Everything, actually. ALM begins with the financial plan, then uses the portfolio to serve it. That means explicitly thinking about what each pool of assets is for and when it will be needed. The traditional approach — one portfolio, one allocation — treats all money as though it has the same job. It doesn’t.
Everything, actually. ALM begins with the financial plan, then uses the portfolio to serve it. That means explicitly thinking about what each pool of assets is for and when it will be needed. The traditional approach — one portfolio, one allocation — treats all money as though it has the same job. It doesn’t.
Everything, actually. ALM begins with the financial plan, then uses the portfolio to serve it. That means explicitly thinking about what each pool of assets is for and when it will be needed. The traditional approach — one portfolio, one allocation — treats all money as though it has the same job. It doesn’t.
For near-term obligations — an emergency fund, a car in two years, a roof that’s aging — you match the asset to the liability. Stable, liquid, not subject to the whims of the market. These dollars aren’t in the market to begin with, so their “sequence” is irrelevant. More than that: you’ve actively chosen the sequence. Instead of hoping the market cooperates when the roof finally gives out, you’ve already decided which assets get used and when. The market’s timing becomes someone else’s problem.
For near-term obligations — an emergency fund, a car in two years, a roof that’s aging — you match the asset to the liability. Stable, liquid, not subject to the whims of the market. These dollars aren’t in the market to begin with, so their “sequence” is irrelevant. More than that: you’ve actively chosen the sequence. Instead of hoping the market cooperates when the roof finally gives out, you’ve already decided which assets get used and when. The market’s timing becomes someone else’s problem.
For near-term obligations — an emergency fund, a car in two years, a roof that’s aging — you match the asset to the liability. Stable, liquid, not subject to the whims of the market. These dollars aren’t in the market to begin with, so their “sequence” is irrelevant. More than that: you’ve actively chosen the sequence. Instead of hoping the market cooperates when the roof finally gives out, you’ve already decided which assets get used and when. The market’s timing becomes someone else’s problem.
For long-term assets — a retirement that’s 20 or 30 years away — you want growth, and you can tolerate volatility because time is on your side. You’re not selling during downturns if you’ve already covered your near-term needs. For the things in between — college in eight years, a parent who may need care in 12, a possible career change — you think carefully about timing, certainty, flexibility, and what the consequence of being wrong actually is.
For long-term assets — a retirement that’s 20 or 30 years away — you want growth, and you can tolerate volatility because time is on your side. You’re not selling during downturns if you’ve already covered your near-term needs. For the things in between — college in eight years, a parent who may need care in 12, a possible career change — you think carefully about timing, certainty, flexibility, and what the consequence of being wrong actually is.
For long-term assets — a retirement that’s 20 or 30 years away — you want growth, and you can tolerate volatility because time is on your side. You’re not selling during downturns if you’ve already covered your near-term needs. For the things in between — college in eight years, a parent who may need care in 12, a possible career change — you think carefully about timing, certainty, flexibility, and what the consequence of being wrong actually is.
This structure doesn’t make you immune to bad luck. My own story makes that clear enough. But it can make bad luck more manageable — because you’re not in the position of having to sell long-term growth assets to cover short-term emergencies, or of being fully exposed to a downturn at the exact moment you need liquidity most.
This structure doesn’t make you immune to bad luck. My own story makes that clear enough. But it can make bad luck more manageable — because you’re not in the position of having to sell long-term growth assets to cover short-term emergencies, or of being fully exposed to a downturn at the exact moment you need liquidity most.
This structure doesn’t make you immune to bad luck. My own story makes that clear enough. But it can make bad luck more manageable — because you’re not in the position of having to sell long-term growth assets to cover short-term emergencies, or of being fully exposed to a downturn at the exact moment you need liquidity most.
The other thing ALM forces you to do is think clearly about what your actual exposure is. Sequence of returns risk is most commonly discussed in the context of withdrawals in retirement. But if you’ve had a decade of below-average savings — for any reason — you’ve already experienced it. You just experienced it on the accumulation side instead of the distribution side.
The other thing ALM forces you to do is think clearly about what your actual exposure is. Sequence of returns risk is most commonly discussed in the context of withdrawals in retirement. But if you’ve had a decade of below-average savings — for any reason — you’ve already experienced it. You just experienced it on the accumulation side instead of the distribution side.
The other thing ALM forces you to do is think clearly about what your actual exposure is. Sequence of returns risk is most commonly discussed in the context of withdrawals in retirement. But if you’ve had a decade of below-average savings — for any reason — you’ve already experienced it. You just experienced it on the accumulation side instead of the distribution side.
That’s not a reason to panic. It’s a reason to take inventory. What did the gap in savings cost? What’s the realistic picture from here? What obligations are still ahead, and which assets are matched to them? A plan built on those questions is more useful than one built on the assumption that everything went according to schedule. Because for most people, it doesn’t.
That’s not a reason to panic. It’s a reason to take inventory. What did the gap in savings cost? What’s the realistic picture from here? What obligations are still ahead, and which assets are matched to them? A plan built on those questions is more useful than one built on the assumption that everything went according to schedule. Because for most people, it doesn’t.
That’s not a reason to panic. It’s a reason to take inventory. What did the gap in savings cost? What’s the realistic picture from here? What obligations are still ahead, and which assets are matched to them? A plan built on those questions is more useful than one built on the assumption that everything went according to schedule. Because for most people, it doesn’t.
The concept of sequence of returns risk is usually presented as a warning about what can go wrong in retirement. It is better understood as a reminder that the order and timing of financial events matters throughout your life — not just at the end.
The concept of sequence of returns risk is usually presented as a warning about what can go wrong in retirement. It is better understood as a reminder that the order and timing of financial events matters throughout your life — not just at the end.
The concept of sequence of returns risk is usually presented as a warning about what can go wrong in retirement. It is better understood as a reminder that the order and timing of financial events matters throughout your life — not just at the end.
The curveballs Jim Otar wrote about don’t wait for your 65th birthday. They show up when your employer reorganizes. When you have a child. When a parent needs help. When the furnace dies in January. Some of those are controllable. Most aren’t. What you can control is how your money is organized to meet them.
The curveballs Jim Otar wrote about don’t wait for your 65th birthday. They show up when your employer reorganizes. When you have a child. When a parent needs help. When the furnace dies in January. Some of those are controllable. Most aren’t. What you can control is how your money is organized to meet them.
The curveballs Jim Otar wrote about don’t wait for your 65th birthday. They show up when your employer reorganizes. When you have a child. When a parent needs help. When the furnace dies in January. Some of those are controllable. Most aren’t. What you can control is how your money is organized to meet them.
This resource is part of the Asset Life Matching library.