James Lavorgna discusses the sequence of returns and aggressive retirement planning. 

Sequence of Returns risk refers to the impact that the order of investment returns can have on people’s retirement savings, especially when people start withdrawing funds. Poor returns early in retirement can significantly reduce people’s savings because they withdraw money while investments are losing value. Conversely, strong returns early on can provide a cushion for future downturns. To manage this risk, it’s important to diversify people’s investments, adjust their withdrawal amounts based on performance, and consider strategies like the bucket approach, which involves separating funds for immediate needs, guaranteed income, and growth investments. Additionally, using guaranteed income products and being flexible with spending can help. The experiences of Sarah and James highlight this risk: Sarah’s savings lasted 40 years due to a strong start in a booming market, while James, who faced early negative returns, depleted his savings after 25 years. Managing the Sequence of Returns risk is essential for a secure retirement. 

Understanding Sequence of Returns: Why It Matters for The Retirement  When planning for retirement, many people think about how much money they will need and how to save up for it. But there’s another important factor that can affect people’s retirement savings: the Sequence of Returns.   

James shared: “I feel one of the most overlooked pitfalls in retirement planning is the effect of sequence of returns on the longevity of retirement income. It’s to the detriment of the retiree if they or their advisors overlook this important principle. 

What is the Sequence of Returns?  A sequence of returns risk applies specifically to retirement income planning and is the risk of negative market returns occurring late in people’s working years and/or early retirement. More specifically, the Sequence of Returns refers to the order in which they experience investment returns. Even if their average over time is good, the specific sequence of those returns can have a big impact on their retirement savings. For example, having negative returns early in retirement can hurt their savings more than having negative returns later.  

How Does Sequence of Returns Risk Impact Retirement Income?  

Sequence of Returns risk is especially important when people start withdrawing money from their retirement savings. Here’s why: 

• Early Negative Returns: If people experience poor market returns early in retirement, their savings can drop quickly. That’s because they’re withdrawing money at the same time as their investments are losing value, making it harder for their savings to recover.
• Early Positive Returns: On the other hand, if they get good returns early in retirement, their savings can grow, giving them a bigger cushion to handle any future downturns.

How to Manage Sequence of Returns Risk 

• Diversify their Investments: Don’t put all their money into one type of investment. Spread it out across stocks, bonds, and other assets. This can help reduce the impact of poor performance in any single investment.  
• Flexible Withdrawal Rates: Instead of sticking to a fixed withdrawal rate, adjust how much they take out based on how their investments are doing. If their investments are down, consider withdrawing less.  
• Bucket Strategy: This strategy has been very successful with clients.  

Bucket #1 Emergency Fund: Keep six months to one year of living expenses in cash or safe investments to avoid selling stocks during a market downturn.  Bucket #2 Guaranteed Income: This consists of all guaranteed fixed income equal to their fixed expenses plus an inflation factor. These expenses must be calculated closely to their fluctuating income needs over their retirement years.   Bucket #3: Invest in stocks and other market-based investments not used for bucket number #1 or bucket #2. That way, whatever happens to these more volatile investments, will never affect their guaranteed increasing income and bucket #2.    

• Use Guaranteed Income Products: Consider products like annuities that provide a steady income regardless of market conditions. This can reduce the need to withdraw from people’s investments when the market is down.  
• Spend Flexibly: Be prepared to adjust people’s spending based on market conditions. Having an emergency fund can help people cover unexpected expenses without touching people’s investments. However, the bucket strategy mentioned above helps mitigate most of the unexpected expenses.  

The Tale of Sarah and James: Sequence of Returns Risk  In a quiet town, two friends, Sarah and James, retired with $1,000,000 each. They planned to withdraw $45,000 annually, increasing this amount by 3% each year to keep up with inflation.  

Sarah’s Story  Sarah retired during a booming market. In her first three years, her investments grew by 25%, 10%, and 5%. Despite a 15% loss in the fourth year, her portfolio had already grown significantly. This strong start allowed her to sustain her withdrawals, and her savings lasted for 40 years. At the 

James’s Story  James wasn’t as lucky. He retired during a market downturn, experiencing a -15% return in his first year. Although the next three years brought returns of 5%, 10%, and 25%, the initial loss was damaging. Because he had to withdraw during a down market, his savings couldn’t recover, and he ran out of money after 25 years. 

About James Lavorgna 

Mr. Lavorgna started in the insurance business in 1976 and has been in the financial services industry for 45 years. He earned his Certified Financial Planning designation in 1984. He also has earned a Bachelor of Science in Finance, Juris Doctor (Litigation), Master of Laws in International Tax and Offshore Planning, and Master of Laws in Wealth Management and Private Banking. He has been in and associated with the investment industry since 1979. And is currently an Investment Advisor Representative of Forsyth Wealth Management, Inc., a fee-only Registered Investment Advisor and licensed insurance agent. He is also the Managing Member of Spencer Advisory Services, LLC, and a Certified Team Based Model Consultant. He has spent his career consulting with successful business owners and high-net-worth families.

Learn more: spencervfo.com 

Spencer Advisory Services, LLC (SAS) is not offering tax, legal advice or investment advice and is for educational purposes only. We strongly encourage people to seek advice from qualified tax and/or legal experts regarding the best options for their particular circumstances or hire the services of SAS. Investment advisory services are only offered through Forsyth Wealth Management, Inc.(FWM). Life, long-term disability, long-term care, or other non-variable insurance products are offered individually through licensed insurance producers. Any U.S. tax advice contained in communication was not intended, to be used and cannot be used, by the recipient for the purposes of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax laws. 

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