How The Sequence Of Returns Risk Can Be A Spoiler For Your Retirement

Imagine a retiree investing just 50% of their corpus in December 2007, at the peak of euphoria in the Indian equity market during the 2003-07 bull run.

- ABHISHEK KUMAR

The BSE Sensex closed above 20,000 on 11 December 2007. By October 2008, the retiree would have notionally lost more than 60% of their equity corpus when the Sensex plummeted below 8,000. This risk, wherein negative market returns occur early in retirement or even during the last leg of working years, impacting the longevity of retirement savings, is known as sequence of returns risk.

It's one thing to claim that equity investments, on average, provide a certain return, but it's an entirely different matter when the specific pattern of gains or losses cannot be predicted in advance.

Consider a scenario with two retirees, A and B. Retiree A, upon retiring, invested 50% of their retirement corpus in an Index Fund tracking the S&P BSE Sensex in March 2003 when the Sensex was around 3,000. This retiree witnessed a doubling of their equity investment in the first year and, by December 2007, grew their equity investment nearly 7 times the original amount.

Upon observing this success, Retiree B decided to allocate 50% of their retirement corpus to equity. However, facing the downturn described at the start of the article, Retiree B fared worse.