rbaldini wrote: ↑Tue May 12, 2020 10:58 am
David Jay wrote: ↑Tue May 12, 2020 10:55 am
rbaldini wrote: ↑Tue May 12, 2020 10:40 am
Correct me if I'm wrong, but sequence of returns risk always exists after retirement. It's not like it goes away after the first x years. It is always the case that losing a bunch now is worse than later. I suppose one difference is that you are x years older, and therefore your long term needs are reduced (in other words, you are closer to death), so maybe there isn't the same need to guard against that risk?

Sustainable withdrawal rates are strongly affected by the early years. Compounding effects occur in both positive and negative directions. A major downturn in first 5 years after retirement has a

**much greater effect** on portfolio longevity than in - say - the 15th year of retirement.

Let's say you are in the 10th year of retirement *right now*. Is it not the case that "a major downturn" right now is much worse that a major downturn in 10 more years? (Replace 10 with any number you want).

In other words, *at every moment in retirement*, it is always worse to lose a lot in the near term than in the far term. In other words, there is always the same sequence of return risk, because the constant withdrawal rate reduces your ability to make up the difference later. If this requires you to be conservative at year 1 of your retirement, should it not require the same every year after?

I was less than satisfied with my first answer to your question:

What you say is logically true in isolation, but if you have 2 million at year 10 due to good sequence of returns in those first 10 years, it is very different from having only 500K due to a bad sequence of returns in those first 10 years.

So I decided to explore this a bit more. I have come to the conclusion that SOR impact is dramatically influenced by the distance (in number of years) between the sequence inversion points, let me show my work:

I used a similar arrangement as in my previous example bu this time I show the SOR difference between a 30 year sequence of returns inversion and a two year sequence of returns inversion:

Example (using real dollars):
$1.0M portfolio

$50K annual withdrawal for living expenses (for replication, expenses are withdrawn after portfolio return each year)

**30 years**
29 up years, 8% annual gain each year

1 down year, 30% loss

Position the down year at the

*end* of the sequence (29 up years, then 1 down year), remaining portfolio after year 30: $ 2,833,285

Position the down year at the

*beginning* of the sequence (1 down year, then 29 up years), remaining portfolio after year 30: $857,932

Over a 30 year span, the sequence of returns difference for inverting the sequence of a single down year is

**330%**.

Note that the portfolio never recovers to it's initial value after a single initial 30% drop when using a 5% withdrawal.
**2 years**
1 up year, 8% gain

1 down year, 30% loss

Position the down year at the

*end* of the sequence (1 up year, then 1 down year), remaining portfolio after year 2: $ 671,000

Position the down year at the

*beginning* of the sequence (1 down year, then 1 up year), remaining portfolio after year 2: $ 652,000

Over a 2 year span, the sequence of returns difference for inverting the sequence of the single down year is

**2.9%**
In summary, the more years in the inverted sequence, the larger the effect on portfolio size. I keep coming back to this, it is the

**withdrawals** that drive sequence of return risk. If there were no withdrawals then the commutative property of multiplication would apply and the results for the two calculations for each term would be identical (x*y*z =z*y*x).

So, in answer to the question initially posed: No, the sequence of returns risk over the final 20 years of retirement will be significantly less than the sequence of returns risk over the full 30 years of retirement.

Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius