Managing Sequence Risk to Optimize Retirement Income

This study confirms that the sequence of investment returns can dramatically affect retirement income, for better or for worse. But although asset returns are unpredictable, it suggests that decumulating investors do not have to resign themselves to the accident of their retirement date. The study suggests that by pursuing a simple trendfollowing strategy over the past 142 years, investors would have substantially cut sequence risk while maintaining or improving their returns. In most cases, they could, therefore, have bolstered the amount they could sustainably withdraw from their retirement funds each year. Other market valuation methods, such as the CAPE ratio, might also help guide withdrawal rates when adopted on a regular basis, perhaps annually.