SEQUENCE RISKS, WITHDRAWAL RATES & GOALS BASED PORTFOLIOS

^{By Louis Green, CFA®, CFP®, CRPS®}

Sequence Risk

Having a plan to pay for your expenses in retirement is important because the amount you pull from your portfolio and the timing of those withdrawals are vulnerable to sequence risk, which is the risk of negative market returns right before or soon after you retire. Sequence risk is especially dangerous during the earlier years of your retirement if you are using a diminished portfolio to fund your living expenses. You should expect market volatility and structure your portfolio accordingly.

This is why you should pay special attention to your asset allocation, expenses, and emergency fund. In the next section, we will discuss how to create a goals-based portfolio to address sequence risk.

Withdrawal Rates

The amount you will need to pull from your portfolio will be one of the factors that determines how long your portfolio might last through retirement.

For example, the chart below represents two sample portfolios. Both portfolios started at $1,000,000 in July of 2004.  Sample portfolio #1 (purple data line) had a 4% annual withdrawal rate over the following 20 years. Sample portfolio #2 (orange data line) had a 5% annual withdrawal rate over the same time period. As illustrated, the 4% portfolio ended with a value of $1.571 million, compared to $991,370.5 for the 5% portfolio – demonstrating a significant difference.

4% vs 5% Annual Withdrawal ¹

^{Hypothetical scenarios are for informational purposes only and do not represent an actual investor situation or actual outcome. All investments involve risk, including loss of principal. Past performance is not indicative of future results.}

Goals-Based Portfolios

Consider a goals-based portfolio that holds assets for a combination of your short-, medium-, and long-term goals. Any assets you need over the short term should be invested in lower risk assets such as a money market fund or short-term, high-quality bonds. Assets used to fund your intermediate goals can be invested more aggressively in a combination of intermediate bonds and equities. Finally, consider assets, such as alternative investments to fund long term goals, if you meet the investor qualifications and they are within your risk tolerance.

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All advisory services are offered through Savvy Advisors, Inc. (“Savvy Advisors”), an investment advisor registered with the Securities and Exchange Commission (“SEC”).

^{1 YCharts. 50/50 Portfolio: 50% S&P 500 Total Return, 50% Bloomberg U.S. Aggregate Bond Index Total Return. [July 2nd, 2024]}