Which statement about sequence of returns risk is correct?

Which statement about sequence of returns risk is correct?

• A. Sequence of returns risk is about the order in which investment categories perform in a best-case scenario.
• B. Sequence of returns risk is the risk that a portfolio’s returns will be unusually high early in retirement, increasing safety.
• C. Sequence of returns risk is mitigated entirely by maintaining a fixed withdrawal rate.
• D. Sequence of returns risk matters because poor returns early in retirement can deplete assets faster, affecting sustainability of withdrawals.

Answer: (D)

Sequence of returns risk is about how the order of investment returns affects how long a portfolio can sustain withdrawals, especially once retirement begins. When withdrawals are taken, poor returns early in retirement reduce the portfolio’s value at a time when it has less time to recover, so later favorable years may not be enough to rebuild the balance. This risk matters precisely because bad early performance can deplete assets faster, making withdrawals unsustainable even if later returns are better. The other ideas don’t fit because sequence risk isn’t about a best-case ordering of categories or about high early returns increasing safety. Nor does a fixed withdrawal rate completely eliminate the issue—the order of returns still influences how quickly the portfolio is drawn down and whether it can sustain withdrawals over time.

Sequence of returns risk is about how the order of investment returns affects how long a portfolio can sustain withdrawals, especially once retirement begins. When withdrawals are taken, poor returns early in retirement reduce the portfolio’s value at a time when it has less time to recover, so later favorable years may not be enough to rebuild the balance. This risk matters precisely because bad early performance can deplete assets faster, making withdrawals unsustainable even if later returns are better.

The other ideas don’t fit because sequence risk isn’t about a best-case ordering of categories or about high early returns increasing safety. Nor does a fixed withdrawal rate completely eliminate the issue—the order of returns still influences how quickly the portfolio is drawn down and whether it can sustain withdrawals over time.