Financial Misadvise: Common mistakes and assumptions made by Financial Advisors (Part 2: Sequence of Returns Risk)

(This is the second article in a four-part series. Click here to read Part 1).

By:  Henry VanBuskirk, CFP®, Wealth Manager

We last left off our story with Mr. Fox understanding that the stock market doesn’t predictably earn a set 4% per year. While you may be able to predict the day that you retire, the market is indifferent to your projected retirement date and will do whatever it’s going to do in the future. We will guarantee that the market will be predictably unpredictable in the days, weeks, and months leading up to, on, and following your projected retirement date. This is Sequence of Returns risk and is the risk of simply having bad luck at the time of your retirement. After all, we’ve all heard the horror stories of friends or family that retired right when 2008 happened. If your portfolio has a large loss in the early years of your retirement, then your retirement may be less comfortable as your account balance may never fully recover. Mr. Fox understands this risk but cannot quantify it. He proceeds to ask a new advisor to the story, Ms. Sequence, to run the numbers for him.

Ms. Sequence knows that Mr. Fox isn’t trying to spend his twilight years repeating, “Welcome to Walmart”, thousands of times a day to aloof passers-by to make ends meet. Ms. Sequence also knows that assuming a return of 4% per year into perpetuity doesn’t paint an accurate financial portrait. To account for sequence of returns risk, Ms. Sequence takes Mr. Fox’s financial plan and runs two different scenarios:

Let’s assume that Mr. Fox lives to age 100 (distribution period of 20 years) and this investment return pattern repeats every 5 years. As illustrated above, both scenarios have a 4% average return. At the end of the 20 years, Scenario 1 shows an account value of $11,326 and Scenario 2 runs out of money when you are 94. Here are the numbers:

Mr. Fox reviews the two scenarios and is surprised by the huge discrepancy in his financial plan’s success rate. He is also concerned that the $80,000 per year distribution plan does not seem feasible unless the stock market starts off on a good note. After meeting with both Mr. Valuation and Ms. Sequence, Mr. Fox would feel more comfortable withdrawing $70,000 per year rather than $80,000 per year. To dive deeper into why Sequence of Returns Risk is in a category of paramount risks to consider, please feel free to watch our short video on Sequence of Returns Risk.

Mr. Fox asks Ms. Sequence, “This is amazing that you can run these different scenarios. How does your Financial Planning Software Work?”. Ms. Sequence gives Mr. Fox a blank stare and says, “I don’t know”. Mr. Fox calls a friend, but she also isn’t sure how to help him. For many people like Mr. Fox, their stories end here and are just told, “The financial planning software is always right.” I guess as long as we don’t continuously chant, “Four legs good, two legs bad” as an unconscious response, our financial advice and retirement infrastructures will be fine. After all, if you bought a Big Mac at McDonald’s and ask the franchisee what goes in it and they respond, “I don’t know.”, would you want to take a second bite?1. It is important to know that the financial planning software is not infallible, and assumptions have to be made. Mr. Fox is curious to learn what assumptions are used in Ms. Sequence’s financial planning software and goes through his list of contacts, thinking who he should call for help. Mr. Fox decides to call his friend, C. Montgomery “Monty” Carlo, who Mr. Fox believes can help him answer his questions.

Monty is the old miserly owner of a nuclear power plant who spends most of his days tinkering with his Financial Plan on his Financial Planning Software, Krusty Co. He is too engrossed in scenarios showing a 100% success rate to learn where that 100% probability of success comes from. His only other hobby besides tweaking his own financial plan is siccing his attack hounds on strangers asking Monty for money. Monty agrees to help Mr. Fox since Monty wants to make sure he understands why his plan is always 100% successful, regardless of the various scenarios he puts into his financial plan. He calls Krusty Co. and has the following conversation to ask where the assumptions come from:

Krusty Co. Representative: “Hi, this is Waylon.  Thank you for calling Krusty Co., how can I help you?”

Monty: “Hi Waylon, my name is Monty and I have a few questions for you.”

Waylon: “How can I help you, Monty?”

Monty: “What is a Monte Carlo Simulation and how is this implemented into the Financial Planning Software?”

Waylon: “The Financial Plan uses a Monte Carlo simulation of 1,000 randomly generated market returns and volatility assumptions called trial runs and aggregates these trial runs into a percentage probability of success.”

Monty: “So since the scenarios are random and do not incorporate current stock market valuations, the Financial Planning Software does not factor in whether or not the stock market is in a bull or bear market at the time of the trial?”

Waylon: “Correct. This is an assumption we have to use. Financial Planning Software is not robust enough to also factor in current market valuations on top of generating a Monte Carlo simulation for a Financial Plan.”

Monty: [To himself: This is nice to know, but I want to make sure my plan is bulletproof] “I use Standard Deviation to gauge portfolio risk. Is there an issue with relying on Standard Deviation to gauge portfolio risk?”

Waylon: “Yes. Sequence of Returns risk addresses a very real concern.  Standard Deviation at the tails (very high unexpected returns or very low unexpected returns) is not factored into a Monte Carlo simulation because the number of trials we would need to run is much too high, and the program is not robust enough to do this. We believe that 1,000 trials are sufficient. Enough trials where we get a satisfactory result without needing to take an hour to run each scenario.”

Monty: “The last question that I have is I have some Series I bonds that I bought this year and as you know they are only taxed at the federal level and not at the state level. I live in a state that has a state income tax2. I’m likely to move to Florida where there is no state income tax, but I would like to understand the tax implications on the Series I bonds if I don’t move. How would I model this into the program?”

Waylon: “There currently isn’t a way to model this in. It would be best to assume that the bond is also taxable at the state level so that your financial plan is more conservative than it actually is.”

Monty: [To himself: In reality, I would not need to pay as much in taxes over my life than what the financial plan is projecting if I don’t move to Florida, but I like the conservative approach to this workaround]. “Those are all of the questions that I had. Thank you, Waylon, for your time.”

Waylon: “You are welcome, Monty. Have a good day.”

Monty: “Thank you. You as well.”

After hanging up the phone, Monty then strangely mumbles “Excellent” to himself in a Machiavellian tone, delighted to get answers to his questions. The next day, Monty proceeds to call Mr. Fox to discuss the conversation that Monty and Waylon had about the Financial Planning Software assumptions. Mr. Fox thanks him for the information and then mentions the phrase “Roth Conversion” to Monty. Mr. Fox says that it’s a way to take money from your IRA, pay taxes, and then convert that amount into a Roth IRA. As long as you are over age 59.5 and wait 5 years before taking money from the Roth IRA, distributions are tax-free. Monty appreciates the information but mentions he only has $10,000 in an IRA and doesn’t see the benefit of converting his IRA since Monty’s net worth is $100,000,000 and Monty only spends $5,000 per month. Monty and Mr. Fox then end their phone conversation. Unbeknownst to Monty, his janitor, Mr. Hill, was in the room and heard the full conversation and thought a Roth Conversion might be a good idea for his parents. Mr. Hill decides to discuss this when he goes to visit his parents in Texas next week, which is when we will pick this story back up.


  1. Snowball is not an ingredient in a Big Mac and Napoleon is not the CEO of McDonald’s. Big Macs use 100% all-beef patties. Snowball was last seen on Foxwood Farm (or was it Pinchfield farm? I can’t remember). Napoleon was last seen in the Bahamas fighting extradition to the United States for his (alleged) multi-billion-dollar fraud scheme through his now-bankrupt cryptocurrency exchange, Windmill.
  2. We know that Monty currently lives in Springfield, but we do not know exactly which Springfield it is since Monty is a very private person.  All we know is that it is a Springfield in a state with state income tax.


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Please Note: The above projections are based upon historical data and should not be construed or relied upon as an absolute probability that a different result (positive or negative) cannot or will not occur. To the contrary, different results could occur at any specific point in time or over any specific time period. The purpose of the projections is to provide a guideline to help determine which scenario best meets the client’s current and/or current anticipated financial situation and investment objectives, with the understanding that either is subject to change, in which event the client should immediately notify BFSG so that the above analysis can be repeated.

What is the Biggest Enemy of Your Retirement?

By:  Henry VanBuskirk, CFP®, Wealth Manager

When you google “Biggest Enemy of Retirement” you will get around 20 million results with answers such as (1) inflation, (2) lower interest rates, (3) higher interest rates, (4) procrastination, (5) taxes, (6) overspending, (7) whatever politician a talking head doesn’t like that day and (8) you.  The answers to your questions, “I’ve saved and saved my whole life.  How do I retire?  Can I ever retire?  Do I need to save more?”, can be very daunting to think about and still might be unanswered.  This may lead you to continue your google search, leaving you overwhelmed and unsure of where to start.  Spending your whole life accumulating and hiking up “Retirement Mountain” might leave you frozen at the summit, not sure how to get down.  We don’t want you to spend the rest of your life in fear, ultimately ending up like Preston Blake (pictured above) from the 2003 movie Mr. Deeds. 

Our goal is to help you get down “Retirement Mountain” safely and understand the biggest enemies you might face on your descent (the deaccumulation phase).  This will tell us what your deaccumulation phase realistically looks like and how you can get there.  The most common retirement foes we’ve faced when helping clients over the years are: (1) Taxes and spending, (2) Volatility, and (3) Emotional decision making.   

Taxes and Spending

This one might seem obvious, but how much you spend and how much you give Uncle Sam are big indicators of how well your financial future is going to look.  If most of your retirement income comes from social security, pensions, and/or annuities, you are mainly on a fixed income.  A large unplanned expense (i.e., home maintenance, medical bills, or car repair) can put a damper on your monthly budget, but you still have to get the money to pay for that unplanned expense somewhere.  To illustrate this, I have the following example:

Clark and Ellen Griswold have the following sources of income each year:

  • Clark’s Social Security – $20,000
  • Ellen’s Social Security – $20,000
  • Clark’s pension – $10,000

They spend $4,000 per month, live in Florida (no state taxes), and also have the following investment accounts:

  • Clark’s IRA – $100,000
  • Clark and Ellen Joint Investment Account (JTWROS) – $100,000

The joint account has the following positions:

They have no other assets. 

Clark and Ellen have a sudden roof leak that they need to repair, and it will cost them $35,000.

Clark and Ellen have two options:

Option 1 – Take the money from the IRA  

Any distributions received by the IRA owner are taxable at ordinary income when received.  They withdraw $40,000 from the IRA, pay $5,517 in federal taxes, and receive a net amount of $34,483.  Just enough to pay for the roof repair.

Option 2 – Take the money from the Joint account

As referenced previously, the joint account has ABC stock, DEF stock, and XYZ stock.  After talking with our team at BFSG, we recommended that Clark and Ellen sell ABC stock and DEF stock and withdraw $35,000 from their Joint Account.  They will realize a short-term capital loss of -$3,000 and a long-term capital gain of $20,000 but actually won’t owe any taxes this year.  They were able to keep their IRA intact and pocket tax savings of $5,517.  Maybe they should put some of those tax savings in the bank in case of a rainy day. Here is a summary from our tax planning software provider that illustrates the differences between these two scenarios:

Here at BFSG, we abide by Uncle Sam’s rules, but we like to make him work for his money.  Uncle Sam is not a charity, so don’t treat him like one. 

Another enemy that you will most likely face is volatility, which we are going to tackle next.

Sequence of Returns Risk

Volatility is a topic that we’ve all heard over the news lately and it is usually framed in a negative light, but volatility can also be a positive depending on where you are in your life.  If you are a young working professional with 30 years left until retirement, you are able to continue contributing to your 401(k) and history shows that markets tend to go up more than go down.  If you’re reading this article, you’re probably closer to retirement than not.  How volatility can derail a retirement plan is when distributions from a retirement account occur during a time of bad market returns. A large market loss early into a person’s retirement can dramatically decrease the financial plan’s success.  This is referred to as “sequence of returns risk” and is discussed in the following example.

Example: Two clients, Mr. Jones, and Ms. Smith have $500,000 in an IRA and withdraw $15,000 at the end of each year.  The IRA returns repeat every 5 years and is illustrated below:

Mr. Jones and Ms. Smith have the same average return.  Let’s assume that each client’s retirement lasts 30 years.  At the end of the 30 years, Mr. Jones’ IRA is worth $72,407.70 and Ms. Smith’s is worth $234,336.  Here is the math behind those figures:

Where we are in a market cycle and where you are in your lifecycle are two variables that we need to clearly understand.  If Mr. Jones had a large unplanned expense of $100,000 in Year 27, he couldn’t afford to do it.  On the other hand, Ms. Smith most likely could. 

If you say that you are an aggressive investor, we may need to dial the risk down if you are retiring next year and we continue to have negative stock market performance.  This is where distribution planning becomes important, and we can help address any concerns you may have by having a comprehensive financial plan done. 

Now that you have a comprehensive financial plan in hand, the last major hurdle people face in their retirement is themselves.  Rash emotional decisions that are made in the short term can derail your long-term retirement success and is akin to throwing that comprehensive financial plan that you had in the trash.             

Emotional Decision Making

Many people believe that people in the finance and investment industries know everything about the stock market and can time the stock market.  However, that is not true and any financial advisor that says otherwise is in our opinion lying.  If you or I could time the stock market, you wouldn’t be reading this article and I wouldn’t be writing this article.  You would be on your yacht, and I would be on mine.  Where I add value as a financial planner is by making sure that you don’t make any rash, short-term emotional decisions that impact the long-term success of your plan.  In this case, you can be your own worst enemy when it comes to your retirement plan.  When you get nervous and make an emotional decision, the below chart illustrates what the consequence of doing so can be: 

Source: Schwab Center for Financial Research with data provided by Standard and Poor’s.

As you can see, thinking that anyone can time a stock market downturn can be detrimental.  We don’t know when those top 10 days over a 20-year period will occur, but we know that if you’re invested every day during that 20-year period, you will (by default) hit those 10 best days.  Getting out of the market (regardless of when or what the talking heads are saying) runs the risk of you missing out on those good days.  Half of the S&P 500’s best days in the last 20 years were during a bear market.  Where our firm adds value is keeping you level-headed and focused on your long-term financial plan. 

In Summary

There are a number of other retirement enemies that we haven’t addressed and some of them might not apply to you.  The only way to know which foes we need to help you face is by determining what your retirement picture looks like.  This is done by crafting your comprehensive financial plan, having continued conversations about it throughout your lifetime, and updating it throughout life’s ups and downs.  Get the process started by giving us a call or by emailing us at financialplanning@bfsg.com.  We look forward to helping you get to and through retirement.

Additional Sources:

  1. GMO “Who Ate Joe’s Retirement”, 2015. (https://www.nebo-gmo.com/insights/whitepapers/who-ate-joes-retirement-3)
  2. Hartford “10 Things You Should Know About Bear Markets”, 2022. (https://www.hartfordfunds.com/practice-management/client-conversations/managing-volatility/bear-markets.html)

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.