Forbes: Sequence of returns risk is ‘upending’ retirement

A new column published by Forbes details that sequence of returns risk is harming retirees, a risk previously described as avoidable with a reverse mortgage

Sequence of returns risk — defined as a risk of receiving lower or negative returns early during a time when withdrawals are made from an investment portfolio — is harming the ability for many seniors to retire when they initially planned to, throwing actual retirement dates into doubt as people everywhere continue to reckon with historic levels of inflation and economic volatility.

This is according to a column published by Forbes and written by retirement financing columnist Bob Carlson.

“About 48% of people who were planning to retire in 2022 are putting their plans on hold or reconsidering them, according to a recent survey taken by Quicken,” Carlson writes. “Another 22% of people who were planning to retire sometime after 2022 are considering delaying their retirement dates.”

An additional survey conducted by BlackRock indicated that the number of respondents reporting that retirement plans were “on track” declined by 5% to 63% compared to the same period one year earlier, with another 42% of respondents describing that retirement plans were altered by the ravages of the COVID-19 coronavirus pandemic.

“We’re living through an example of sequence of returns risk and how it can arise quickly and unexpectedly,” he writes. “Many people build their retirement plans on long-term average financial data or on the assumption that recent performance will continue indefinitely. Events often don’t unfold that way. The long-term average of stock index returns is the result of years of very different returns. It’s a rare year when the return of an index is close to its long-term average. In most years the return of an index is very different from the long-term average.”

In the past, sequence of returns risk has been a commonly-discussed retirement risk during times of market volatility by Wade Pfau, professor of retirement income at the American College of Financial Services and founder of Pfau has previously described how a reverse mortgage has the potential to help someone at or near retirement avoid sequence of returns risk if a borrower taps a standby line of credit until the market — and their investments — stabilize.

“Even if the overall market recovers, a retiree spending from their portfolio might not get to enjoy that recovery,” Pfau explained in a 2020 episode of The RMD Podcast. “And that sequence of returns risk amplifies the impact of investment volatility. So, that’s where a reverse mortgage can fit into this in a number of different ways to help alleviate that risk on the investment portfolio.”

Read the Forbes column on current levels of sequence of returns risk.

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