Blog

Marcus Iwig

One of the biggest risks facing retirees in the medical profession is sequence of returns risk.  This is the risk that, early in retirement, returns of an invested portfolio are very low or negative, even if long-term returns meet initial expectations.  Generally, during those first few years of retirement, retirees have the most dollars they’ll ever have working for them and they are likely spending at relatively high levels since they are generally healthy and have time on their hands. If they get low or negative returns during those early years, it can have a significant impact on the sustainability of their assets.  By some definitions, sustainability is the capacity to endure.  Our physical health and endurance often comes from a combination of healthy habits like a diverse, healthy diet, different types of exercise and enough water.

From January 2000 to December 31, 2009 the S&P 500 had an annualized return of -0.95%.  Had this represented the majority of a retirees’ portfolio during those years, there certainly could have been significant impact on the sustainability of their assets.  During those same years, the following are annualized returns of other markets around the world:

  • Barclays Global Aggregate Bond Index: 49%
  • Russell 1000 Value Index: 47%
  • Russell 2000 Index: 51%
  • Russell 2000 Value Index: 27%
  • MSCI EAFE Index: 17%
  • MSCI EAFE Small Cap Index: 3%
  • MSCI EAFE Small Cap Value Index: 02%
  • MSCI Emerging Markets Index: 78%

(Data Source: Morningstar Direct®)

Without doing the math, you can imagine the difference that holding a diversified portfolio would have made during those years.  Like our physical endurance, one of the ways to create sustainability and endurance is to diversify (or in the case of an athlete, cross-train) across domestic and foreign asset classes.

Just like a marathon runner may feel they’re falling behind by spending a day or two each week swimming or biking instead of running, investors may, at times, feel like they’re missing out by being diversified across global markets. However, the career length and durability of the cross training runner and the portfolio of the diversified investor may both be enhanced by not focusing exclusively on one thing.

Another way to combat sequence of returns risk is to avoid or minimize withdrawals from the portfolio early in retirement.  Many of the strategies to do this center around individual planning opportunities that need to be assessed on a case-by-case basis with your financial planner.  Some examples include:

  • Utilizing a deferred compensation plan to fulfill your cash-flow needs in early retirement years.
  • Converting a business interest to cash-flow early in retirement instead of tapping your invested portfolio.
  • Utilizing the cash value of an old life insurance policy to fund early years of retirement.

These are not broadly applicable ideas, but could be things to evaluate in your plan.

We all hope for a long, healthy retirement.  Remember that when it comes to investing for retirement, it’s a marathon, not a sprint!

Please Note:  Past performance may not be indicative of future results.  Therefore, no current or prospective client should assume that future performance of his/her account will be profitable, or equal any corresponding historical index/benchmark referenced above.  The historical performance results for the comparative indices reflect reinvested dividends, but do not reflect the deduction of an investment management fee, which would have the effect of decreasing indicated historical index performance results. The historical performance results are provided exclusively for comparison purposes, to provide general comparative information to assist an individual client or prospective client in determining whether a certain type of asset allocation meets, or continues to meet, his/her investment objective(s).
Please Also Note: (1) a description of each of the comparative indices is available upon request; (2) performance results do not reflect the impact of taxes; (3) It should not be assumed that a client’s account holdings will correspond directly to any such comparative benchmark index; and, (4) comparative indices may be more or less volatile than a client’s Foster Group account.
In the event that there has been a change in a client’s investment objectives or financial situation, the client is encouraged to advise Foster Group immediately.  Different types of investments and/or investment strategies involve varying levels of risk, and there can be no assurance that any specific investment or investment strategy (including the investments purchased and/or investment strategies devised or undertaken by Foster Group), will be profitable for a client’s or prospective client’s portfolio.


PLEASE NOTE LIMITATIONS: Please see Important Disclosure Information and the limitations of any ranking/recognitions, at www.fostergrp.com/info-disclosure/. A copy of our current written disclosure statement as set forth on Part 2A of Form ADV is available at www.adviserinfo.sec.gov.