Sequence Of Investment Returns

Sequence Of Investment Returns

Most retirees would be pumped to earn a 10% average annual return during their retirement years – but averages can be misleading during the distribution phase.

In the world of investment returns, the results of one year are related to the results of the next, because both are being compounded on a dollar amount that grows or decreases in year 1 before being compounded again by the return in year 2 and so on.  As a result, a simple average arithmetic return fails to capture the compounding effects that occur from a sequence of investment returns, especially when withdrawals are taking place.

It can often be the sequence of returns that will result in investment success or failure in retirement.

Let’s take a look at two hypothetical portfolios:
  • Each has an initial investment of $500,000
  • Portfolio 1 illustrates real S&P 500 returns from 1969 to 1994
  • Portfolio 2 reverses the order of the S&P 500 returns
  • $30,000 annual withdrawals beginning in year 1 adjusted 3% each year for inflation

Portfolio 1


Portfolio 2


Average Annual Return



Total Income



Ending Account Balance


With portfolio 1, the market delivers negative returns during the early years of distributions and the reverse is true with portfolio 2.  A period of market losses that occurs when a person is transitioning into retirement may have a devastating impact on the income potential of the investment portfolio.

We do not have control over the markets, but we do have control of where the distributions are pulled.  Having another “pool of assets” not correlated to the stock market can help limit the sequence of returns risk to your investment portfolio.  Under this approach, the retiree will avoid taking distributions from the investment account in those years that follow a negative return.  By avoiding distributions in these years, the impact of the negative market returns would be far less.

A cash value whole life insurance policy can be a great alternative approach that provides guaranteed tax-deferred growth and tax-free income of the cash value via partial surrenders and policy loans.  In addition, the income tax-fee death benefit can protect your income during your working years, ensuring your legacy to your family.

A healthy 35-year-old female purchases a whole life insurance policy that is structured with only twenty years of payment at $500 a month.


Projected Cash Value

Projected Death Benefit










Contact your Life Insurance Specialist for details!