Why Stress Test Financial Outcomes | Sequence of Return Risk
Imagine 3 retirees with the same portfolio value, withdrawal rate, and average rate of return over the same time period. How can the financial outcome of each retiree be different? One having about as much as they started with, one ending with almost nothing left over, and one having run out of money (a detrimental retirement outcome).
It’s not just the rate of return, but the sequence of return, that matters when taking withdrawals in retirement. That's because withdrawals compound losses. Watch this 3 minute video about how sequence of return can impact your financial outcome, and why we stress/scenario test financial outcomes by planning for the worst, hoping for the best, and reality usually being somewhere in-between.