This post was authored by Salvatore M. Capizzi, Dunham's Chief Sales & Marketing Officer. If you have questions concerning today's topic, please call us at (858) 964 - 0500. Hold us to higher standards.

The Fable

As a child, one of my favorite bedtime fables was the classic story of “The Tortoise, the Hare, and Sequence Risk,” which I am sure all our parents told us.

The fable starts in the forest, where a 67-year-old tortoise announces to all her forest friends that she will retire. But leaning against a tree, snacking on a carrot, is a hare who quips, “Ha! I am three years old and will retire next year, and I bet you my retirement income will last longer than yours.”

Tired of the hare’s constant bragging, the tortoise took the bet and started down the road of her retirement.  With the S&P 500 at 4,700, the tortoise’s financial advisor, the owl, put her in a diversified portfolio of stocks and bonds.

A year later, when the Hare was ready to retire, the S&P 500 was at 5,875, which netted a nice return for the tortoise starting her golden years.

“Here I come!” The tortoise heard the hare yelling behind her.

But the moment the hare invested in stocks to start his retirement, the New York Giants did not make the NFL playoffs again, which caused the S&P 500 to decline sharply on the news.  The S&P 500 dropped to 4,990 by the end of the year.

The hare, unfortunately, ran into the issue of Sequence Risk, the danger found when taking monthly income from his portfolio while stocks were losing value.

This damaged the hare’s overall return and challenged his ability to retire comfortably.

Put simply, the hare’s monthly income withdrawals from his account during a declining market were more costly than the same withdrawals the tortoise took during a rising market a year earlier.

The tale of “The Tortoise, the Hare, and Sequence Risk” teaches you and your clients a valuable lesson - the significance of sequence risk.

The hare, greedy at the prospects of the high market, faced the consequences of ill-timed withdrawals during a market downturn.

The moral of this classic Aesop fable is the wisdom of minimizing sequence risk in retirement and not being a New York Giants fan.

I learned only one of the two lessons.

The Importance of Sequence Risk for Retirees

Sequence risk is the order in which investment returns occur.

It is the risk that an investor will experience negative portfolio returns very late in their working lives or early in retirement.

This is important because retirees need more time to compensate for losses compounded by the simultaneous drawdown of monthly retirement income distributions.

The implications of this risk are critical to steering their retiree clients toward a financially secure and sustainable retirement.

The Critical Point to Understand

Sequence risk extends beyond the concept of average returns. For your retiree clients, directing your focus to the timing of these returns is critical in retirement planning.

The order in which investment returns unfold can significantly impact the longevity of your client’s retirement portfolio. Sequence risk emphasizes the need for strategic consideration of the investment portfolio you construct and the risk mitigation overlays you employ.

The key concept is that it is not just about the return numbers, but the sequence of these returns that can make or break a retiree's retirement plan.

In our view, strategies that take some of the edges off sequence risk and accelerate recovery time in the market should be included in your planning.

The Morningstar Study (1)

Morningstar conducted a study examining two retirees with a $1 million portfolio. They looked at 30 years of retirement, each needing an identical $40,000 of assets for the first-year income, with the initial withdrawal amount increasing by the annual inflation rate of 2%.

They then said that hypothetically, for each ten-year period, their portfolio return would either:

(1)    Break even.

(2)    Gain 6%

(3)    Gain 12%

They looked at the portfolio achieving each of these annual totals for ten years out of 30 but in a different sequence. Therefore, each of the two investors will earn an annual 5.89% gain over the entire 30-year period.

Their research shows why it is not about average return, but the sequence of those returns that matter.

The Results

The first retiree enjoys a strong start with ten years of 12% returns, followed by a decade of 6% gains, and then breaking even. In contrast, the second retiree experiences the reverse, ten years of breaking even, followed by a decade of 6% returns and ending with 12% results.

Each retiree is on track for an identical average annual return of 5.89%.

The first retiree's account value sits at $2.7 million at the end of 30 years, leaving a generous legacy for their family.

In stark contrast, the second retiree faces financial hardship, going bankrupt by the year 26.

A graph showing the different order

Description automatically generated with medium confidence

Source: Morningstar

Why Such a Sharp Difference?

Morningstar explains sequence risk in terms of withdrawal rates. By year 11, the scheduled withdrawal amount for both retirees is $48,760.

First Investor

However, the first retiree with the better start has $2.2 million in their account. This means that the $48,760 income for year 11 represents a 2.2% withdrawal rate and can absorb the withdrawal easily with a 6% portfolio return.

 Second Retiree

In contrast, the second retiree, with an account value of $562,000, the same $48,760 income for year 11, represents an 8.7% withdrawal rate and reaches the point where the portfolio further dwindles each year, leading to bankruptcy.

 Please remember that the Morningstar study does not represent the actual returns of any investment and is purely hypothetical. But it does drive home important points for your retirement planning.

Morningstar‘s Three Lessons

Morningstar concluded three lessons from the study:

1.      Lesson 1

It stresses that while illustrations of the perils of bear markets are helpful, sequence risk also threatens those who retire into a prolonged stretch of fallow returns, even without a bear market.

2.      Lesson 2

Emphasizes that reducing volatility may help mitigate retirement disasters, showcasing the benefits of holding bonds for improved investment math.

3.      Lesson 3

Discusses how retirees can address sequence risk, presenting different strategies such as adjusting initial withdrawal amounts to mitigate potential challenges.

Final Thoughts

Morningstar's research underscores the complex and impactful nature of sequence risk during retirement, demonstrating the tangible consequences of different sequences of returns on retirees' financial outcomes.

The study provides valuable insights into the importance of strategic planning and risk mitigation strategies to navigate the challenges posed by sequence risk.

Click here or call us at (858) 964 – 0500 to see how DunhamDC can potentially mitigate sequence risk and enhance recovery time.

DunhamDC - Buying Fear and Selling Greed.


(1)    Sequence Risk during Retirement, by John Rekenthaler, August 25, 2022,

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This communication is general in nature and provided for educational and informational purposes only. It should not be considered or relied upon as legal, tax or investment advice or an investment recommendation. Any investment products or services named herein are for illustrative purposes only, and should not be considered an offer to buy or sell, or an investment recommendation for, any specific security, strategy or investment product or service. Always consult a qualified professional or your own independent financial professional for personalized advice or investment recommendations tailored to your specific goals, individual situation, and risk tolerance.

Past performance may not be indicative of future results.  No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. There may be economic times where all investments are unfavorable and depreciate in value.

DunhamDC (“DunhamDC”) is a proprietary algorithm of Dunham & Associates Investment Counsel, Inc. (“Dunham”) that seeks to mitigate sequence risk, which poses a threat to an investor's returns due to the timing of withdrawals. The algorithm employs what Dunham considers to be a pragmatic strategy, generally making incremental increases to the equity allocation when global stock market prices decrease and decreasing it when global stock prices increase. This approach is objective, unemotional, and systematic. Rebalancing is initiated based on the investment criteria set forth in the investors application and is further influenced by the DunhamDC algorithm.

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DunhamDC uses an unemotional, objective, systematic approach. The algorithm does not use complex formulas and is designed to create a consistent process with limited assumptions based on historical data.

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