The Retirement Risk Many Investors Overlook: Sequence of Returns

You reached your retirement savings target. Does that mean you are ready to retire?

Not necessarily.

A retirement projection may look strong on paper, but the outcome can change once regular withdrawals begin. Healthcare expenses, withdrawal rates, inflation, and the order in which investment returns occur may all affect how long a portfolio lasts.

One particularly important concern is known as sequence-of-returns risk.

What is sequence-of-returns risk?

Sequence-of-returns risk refers to the possibility that poor market performance occurs near the beginning of retirement, when an investor is also withdrawing money from the portfolio.

Two retirees may begin with the same amount, withdraw similar sums, and experience the same average return over time. However, the retiree who experiences significant losses earlier may have a very different outcome.

The reason is that withdrawals made during a market decline reduce the amount of money remaining to participate in a future recovery.

Why do early retirement losses matter?

Before retirement, market declines may be uncomfortable, but an investor who is still earning income may have time to wait for a recovery and continue contributing to the portfolio.

After retirement, the situation changes. The investor may need to sell assets regularly to cover living expenses.

If withdrawals occur while investments have declined:

• More assets may need to be sold to generate the same income
• Less capital remains available for a potential recovery
• Future withdrawals may place additional pressure on the portfolio
• The original retirement projections may no longer apply

This is why the order of investment returns can matter, not only the average return.

How do withdrawal rates affect retirement?

A withdrawal strategy helps determine how much income a retiree takes from the portfolio and how that amount may change over time.

A withdrawal rate that appears sustainable under average market conditions may become more difficult to maintain if retirement begins during a prolonged downturn or if expenses increase unexpectedly.

The appropriate approach may depend on:

• Retirement age
• Expected spending
• Other sources of income
• Portfolio allocation
• Inflation
• Longevity expectations
• Willingness to adjust withdrawals
• Legacy goals

What other expenses can affect retirement readiness?

Healthcare can represent a significant and unpredictable retirement expense. Insurance premiums, out-of-pocket costs, prescription medications, and potential long-term care needs may all place additional pressure on retirement assets.

A retirement plan should consider whether there is sufficient flexibility to manage these costs without compromising essential lifestyle needs.

How can a retirement strategy prepare for uncertainty?

Although market returns cannot be predicted, a retirement strategy can prepare for different conditions by considering:

• Cash reserves for near-term expenses
• Appropriate portfolio diversification
• Multiple sources of retirement income
• Flexible spending and withdrawal guidelines
• Healthcare and long-term care costs
• Regular reviews and updated projections
• Adjustments when financial circumstances change

Reaching a savings target is an important achievement, but retirement readiness involves more than one number.

Aventura Private Wealth helps individuals, families, executives, and business owners coordinate retirement income, portfolio withdrawals, investment risk, healthcare considerations, and long-term goals. The objective is to build a strategy that considers not only how much has been accumulated, but how those resources may support life throughout retirement.

Aventura Private Wealth, LLC (“APW”) is a Registered Investment Adviser ("RIA"). Registration as an investment adviser does not imply a certain level of skill or training, and the content of this communication has not been approved or verified by the United States Securities and Exchange Commission or by any state securities authority. APW renders individualized investment advice to persons in a particular state only after complying with the state's regulatory requirements, or pursuant to an applicable state exemption or exclusion. All investments carry risk, and no investment strategy can guarantee a profit or protect from loss of capital. Past performance is not indicative of future results.