Sequence Risk during Accumulation

Discuss what would happen with a balance over 30 years if these index returns were applied to grow the balance each year, but with no annual withdrawals.

It’s important to see how our money works differently during our accumulation and distribution years. We can see that the left and right set of values are the same. If we started with approximately $165,000, and applied the market index returns in historical order or sequence, the money would grow to the $1,000,000 at the end of 30 years.

Now, let’s look at the right set of values as I click on the Shuffle button. Each time I click on the button, we can see that the returns move forward by one year per click forward, and one year backward per click backward. Also notice that the end-of-year balances change each year with the with the exception of the last year.

So what does that tell us about the order or sequence of returns impact on our final EOY Balance during accumulation years where we do not withdrawal any money from the balances?

That’s right, the sequence of the returns does not impact the final EOY Balance.

If we look at these results in Graph form (click Graph), we can see the black line move with changes to the sequence of returns, but always ending up at the same value on the far right of the graph representing the EOY Balance.

[Transition: Now, let’s look at this same type of analysis but add an annual retirement withdrawal and see what impact a change to the sequence of returns might have.]

Withdrawal = 0.

Rate of Return = Market return for selected year, ascending.

EOY Balance =  ([previous year] EOY Balance - Withdrawal) * (1 + Rate of Return)