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Advisor Education

Managing retirement income: Addressing sequence of return risk

Robert Kron
Managing Director, Advisor Education
Retirement income

Volatile markets are unnerving for many investors; newly minted retirees find them particularly worrisome because of sequence of return risk: the risk of receiving lower or negative returns early in a period when withdrawals are made from an investment portfolio. For our purposes, this is the risk retirement income investors face when they retire at the beginning of a down market.

Chart 1 illustrates this risk. Imagine two retirees, each with a $200,000 portfolio. Each experiences the same return sequence over a 20-year period, but one has positive returns at the beginning while the other has them at the end.

As the illustration below shows, if each of our retirees withdrew $10,000 each year from their portfolios, the one who experienced the positive returns at the beginning of retirement found themselves with much more money in their account after 20 years. The retiree who experienced the negative returns at the beginning of retirement essentially depleted their portfolio after 20 years.

Retiring at beginning of bear vs bull market

Note that if neither retiree withdrew money during this period, they would end up with equal amounts because sequence of return risk isn’t a factor until one begins withdrawals. Why? The adage “it’s only a loss if you sell” is never more true than when withdrawing money from a declining portfolio. Regularly scheduled withdrawals, as many retirees elect, compound these losses, giving rise to the less desirable cousin of dollar cost averaging, known as “dollar cost ravaging.

Traditionally, the portfolio construction solution to dampen the sequence impact of return risk has been to ensure a retiree’s allocation has sufficient low volatility assets to reduce the need to sell growth-oriented/less liquid assets at a loss.

For most retirees, it’s much easier to predict cash flow needs in the first two to three years of retirement versus how much they will need in 10 or 20 years: Life happens. Goals change. People change. For that reason, a combination of near-term and long-term portfolio construction may make sense for most retirees. Its simplest manifestation is expressed using two “buckets” of assets:

Bucket 1: Shorter-term liquidity portfolio = Less volatile, highly liquid assets

In this bucket, you want assets that you can sell without a loss to meet expenses for a period of two to four years, depending on your financial plan and risk tolerance.

Bucket 1

bucket one

Bucket 2: Long-term growth portfolio = More volatile, less liquid assets

While higher growth assets like stocks, equity and high yield ETFs and mutual funds are liquid by design, they have historically been more volatile. You don’t want to have to sell them (at a potential loss) to meet an expense need, but rather use them to replenish the first bucket as appropriate. Bucket 2 can also include investments like real estate and private investments that are may be far less liquid than stocks, etc. It’s critical to know and document your acceptable level of volatility and illiquidity in Bucket 2.

Bucket 2

bucket image

As a reminder, Nuveen believes that markets are rapidly repricing around the odds of lower economic growth, more persistent inflation and tighter monetary conditions. Furthermore, we believe that until any of these change, it’s safe to expect continued market swings in both stocks and longer duration bonds.

Allocation considerations for retirement income portfolios: Opportunities exist

For cash going toward the shorter-term liquidity portfolio, higher starting yields today are very good news. For residents of higher tax states, state-specific municipal bond ladders are offering attractive tax-equivalents today. You can diversify this tax-exempt portfolio with taxable strategies like short-term government bonds for added liquidity and even higher quality as well as short-dated high yield bonds and loans for yield enhancement. This first bucket acts as a shock absorber which enables the second bucket to target higher growth (and, as is often the case, higher volatility) assets.

For cash being put to work in the long-term growth portfolio, a combination of equities, real assets and higher yielding, credit-sensitive fixed income should be considered. This portfolio can take advantage of less liquid strategies as well, assuming the liquidity portfolio is large enough to cover any liquidity needs in the next three to five years.

Recent volatility has created select value opportunities in U.S. large cap equities for longer-term investors. For retirees, dividend growers with higher quality balance sheets are a tax-efficient way to generate added income return. We also continue to think private real estate is an attractive way to generate real tax-efficient returns with less volatility than daily traded stocks. More persistent inflation, constrained supply of land and materials, and shifting trends in how we work and live are tailwinds for industrial, specialized office, sunbelt multifamily properties as well as single family rentals.

Keeping up with inflation

No retirement income planning discussion would be complete without a comparison of what things cost in the past vs what they cost today.

item 1982 2002 2022
Loaf of bread $.60 $1.01 $1.61
Movie ticket $2.94 $5.81 $12.09
Home $69,600 $187,200 $408,100

Sources:; 24/7 Wall Street; US Bureau of Labor Statistics

Beyond the nostalgia factor (“I should have invested in loaves of bread in 1982!”), it’s important to understand how inflation can erode retirement income. Your portfolio needs to keep pace with inflation (ideally, outpace it) so that your goals don’t suffer or your lifestyle decline.

A range of investments exists that have historically helped investors keep ahead of inflation - for example, floating rate loan funds, certain commodities, and TIPs. These are only examples and there are more like them (of course, no investment’s performance is guaranteed). The important thing to remember is to be sure to include inflation projections and potential protections in your retirement income planning discussions.

Two advisor-client conversations to consider today

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If you’re an investor and want more information, please reach out to your financial professional. If you’re a financial professional, please contact your Nuveen Advisor Consultant at 800-752-8700.

This material is provided for informational and educational purposes only.

All investments carry a certain degree of risk, including the loss of principal. Investment objectives may not be met.

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