Sequence of Returns Risk Happens Once in a While
There have been three recent major periods when sequence of returns risk significantly impacted retirement portfolios that are available for us to study. The 1930s, 1970s, and 2000s. This means that seven out of ten decades since the 1930s have not experienced sequence of returns risk. We should also know a little about those decades.
Understanding Sequence of Returns Risk
Sequence of returns risk is the danger that poor investment returns early in retirement will permanently harm a withdrawal portfolio. Your legacy for the kids depends on stock market returns in the first few years of your retirement.
Here are the three times when sequence of returns risk hit:
The 1930s The Great Depression
The stock market crash of 1929 and the ensuing Great Depression triggered the most severe sequence risk in modern history. The S&P 500 dropped 86% from its peak.
The 1970s Stagflation
Stagnant growth and inflation exceeded expectations. Despite positive nominal stock returns, real returns were negative because of 7% annual inflation.
The 2000s The Lost Decade
From March 1999 through February 2009, the stock market lost more than 30% of its value, marking the worst decade for U.S. stocks since the Great Depression. This period included both the dot-com crash (2000-2002) and the 2008 financial crisis, during which retirement accounts lost $2.8 trillion or 32%.
The Seven Resilient Decades
The decades that did not experience significant sequence of returns risk include:
- 1940s – Strong wartime and post-war economic growth (8.5% annual returns)
- 1950s – Exceptional performance with 19.5% annual returns
- 1960s – Steady growth with 7.7% annual returns
- 1980s – Outstanding bull market with 17.3% annual returns
- 1990s – Technology boom delivering 18% annual returns
- 2010s – One of the longest bull markets in history with 13.4% annual returns
- 2020s – US dominance (decade incomplete)
Notably, the 1980s and 1990s likely represented the best two-decade bull market in history, with the S&P 500 averaging nearly 18% annually for twenty consecutive years. The only thing that might surpass it is the 20-year returns following the sequence of returns risk that hit those who retired in the 2000s.