When people think of what could haunt their retirement, they often imagine running out of money, facing unexpected expenses, or living too long. But as we discuss in episode 250 of the Financial Symmetry Show, there’s a more insidious villain: sequence of return risk.
Sequence of return risk refers to the threat of poor investment returns occurring early in your retirement years, just when you start withdrawing funds. Even if the average returns over your retirement are sufficient, early losses can irreparably damage your nest egg and dramatically increase the odds of running out of money.
To bring these concepts to life (with a Halloween twist), we walk through a scenario featuring Jamie Lee Curtis’s iconic character, Laurie Strode, imagining her retirement through 25 years of market ups and downs. The outcome all depends on her initial withdrawal strategy and, crucially, how her portfolio is allocated.
The Myth of the 4% Rule and the Slippery Slope of Spending
The 4% rule is a common rule of thumb: withdraw 4% of your portfolio each year (adjusted for inflation), and your money should last 30 years. Let’s imagine that Laurie takes a $50,000 annual withdrawal from her $1 million portfolio, starting in March 2000, the unfortunate eve of the tech bubble’s burst.
With a classic 60/40 mix (60% S&P 500 stocks and 40% bonds), Laurie’s portfolio survives, ending up with approximately $360,000 in 2025. But when she decides to bump her withdrawals to 5%, her portfolio runs dry by 2022. That extra percent makes all the difference, magnifying the effects of sequence of return risk and leaving her financially exposed deep into retirement.
Diversification Is the Unsung Hero in Your Investment Toolbox
Would diversification make a difference? Absolutely. In this episode, we revisit the scenario using globally diversified allocations, balancing U.S. stocks with international and emerging markets.
With a diversified 60/40 portfolio, Laurie ends up with $260,000, still positive, and notably more resilient against market downturns outside the U.S. Even more striking, if Laurie had taken a more aggressive 100% diversified stock allocation (with 50% U.S. and 50% international), the ending value would rise to $470,000, even as she makes annual withdrawals.
This counters conventional wisdom suggesting retirees should drastically decrease stock exposure. History shows, especially over long periods with withdrawal needs, that diversification and adequate equity exposure can actually help protect and extend your portfolio’s lifespan during volatile periods.
The Perils of Over-Concentration and “Too Safe” Asset Allocation
Over-concentration in a single market (like the S&P 500) can leave you vulnerable if that market underperforms, as it did in three 13-year stretches since 1929. At the same time, playing it safe by loading up on bonds, especially if using popular target date funds that decrease equity over time, can expose you to the equally scary risk of outliving your money due to insufficient growth.
Surviving Retirement’s Horror Stories
Real life doesn’t follow a neatly plotted horror script or a linear financial projection. It’s important to build flexibility and emotional resilience into your plan. Monte Carlo simulations, dynamic spending strategies, and periodic portfolio reviews can help you adjust withdrawals or asset allocations as life unfolds and markets shift.
Ultimately, the most important factor for retirement success isn’t just your initial savings or investment choices; it’s the emotional discipline to stay the course when markets get spooky and the flexibility to adapt your plan along the way.
A successful retirement is about more than math: it’s about mindset, flexibility, and having a robust, diversified investment approach. Don’t let the sequence of return risk be the monster under your bed. Instead, arm yourself with knowledge, diversify your investments, and prepare to adapt as life and markets throw their inevitable tricks and treats your way.
Outline of This Episode
- [00:00] A Halloween retirement survival tale, ft. Laurie Strode.
- [03:16] Retirement withdrawal scenarios analysis.
- [07:30] Optimizing financial asset allocation.
- [11:47] Diversification protects retirement portfolios.
- [15:16] Retirement portfolio stress testing.
- [16:41] Retirement planning for stability.
