Sequence of return risk is the fear that an investment portfolio may not be able to sustain the ongoing withdrawals needed to fund retirement. It is a very real and substantial threat, particularly in the early years of retirement. However, this risk can be managed by some simple and dynamic methods. These techniques will help you mitigate your sequence of return risk while also providing you with more flexibility for your future spending. In general, there are three things to keep in mind when dealing with sequence of return risk. First, you need to understand how it works. Learn more about life insurance, view here. This is because this type of risk is different from most other forms of risk. Whether you are building a portfolio to retire on, or deciding to invest for your own personal use, you should be aware of this type of risk. The best way to mitigate it is to diversify your assets, which means investing in more than one asset class. You can also use annuities to reduce the risk of outliving your money. While sequence of return risk is not inherent in any asset class, it can be difficult to control. For instance, your portfolio can return more than the average rate of returns. But it can also lose value. Combined with the occurrence of a market downturn, a negative sequence of returns can have devastating consequences. Ideally, you should aim to avoid any negative portfolio returns. You should also consider the impact of inflation. Inflation-induced increases in cost of living will further exacerbate your sequence of return risk. A higher risk portfolio will decrease in value faster than a more conservative portfolio. There is nothing you can do to prevent this, but you can minimize the shortfall. To calculate the risk of a sequence of return, you first need to know the average annual rate of returns. In other words, what does a particular investment do over the course of a year? If you're looking for a good guide to this, there are several online calculators that provide information on how to calculate this. They can be used to calculate the probability of a particular portfolio's drawdown pattern and how much your net withdrawals will decrease if a particular strategy is implemented. Alternatively, you can calculate the geometric return. This method smooths out the annualized drawdown of your investment portfolio. With this in mind, you can also determine which of the two scenarios will give you the higher returns. Finally, you can decide whether or not you want to hedge your sequence of return risk by using an income annuity. By doing so, you will be able to take advantage of guaranteed lifetime income while also mitigating the risk of outliving your savings. While these calculations can be useful, they cannot be used to measure the overall impact of sequence of return risk on your retirement. Unless you are a long-term investor, you will not be able to avoid this risk completely. Take a look at this link https://en.wikipedia.org/wiki/Life_insurance#:~:text=Life%20insurance%20(or%20life%20assurance,person%20(often%20the%20policyholder). for more information.
