Sequencing of returns: The domino effect
By Mike McGlothlin
Traveling in the Midwest these past few weeks has been less than easy. I almost thought John Candy and Steve Martin were following me through my planes, trains and automobiles. At the gate, I decided to leave the airport, thinking my first flight would not catch the connecting flight. However, as I stepped away from the gate, the flight began boarding and I made a last-minute decision to get on the plane.
As feared, I missed my flight to Buffalo, New York; instead, the airline shipped me to my next day's appointment in Milwaukee and, after my flight from Milwaukee was cancelled, I ended up driving five hours to get home. It seemed as though the first flight set off a chain of events that resonated throughout the rest of my trip.
In retirement planning, we call this sequencing of returns. Having several bad investment performance years over a 30-year retirement cycle is usually not a deal-breaker. However, if those negative years occur at the beginning of retirement, the consequences can linger. So, many times, advisors use an analysis with an average return. If you take the average and place the best years first and/or the worst years first, the account value hits zero in a range of a 13-year difference.
It's important to take the risk of a poor sequence of returns out of your clients' equation, especially early in the retirement years. If I had this week's travel to do over, I certainly would have continued walking away from the gate. Make sure your clients walk away from the gate of potential pitfalls and unknowns. By placing part of your clients' portfolio in a guaranteed growth and guaranteed income stream, you help eliminate the initial sequence of returns. By eliminating that first potential downfall, you have positively impacted the chances of your client having a successful retirement.