the sequence-of-returns returns effect

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  • 1. FORESIGHTActionable perspectiveson topics that impact wealthThe Sequence-Of-Returns EffectEXPLORING THE IMPACT OF VOLATILITY ON RETIREMENT ASSETSInvestors accumulating assets for retirement are generallybetter able to weather increased portfolio volatility thantheir retired counterparts. This is because accumulatinginvestors are typically able to make regular contributions into theirrespective portfolios, regardless of market conditions.THE SEQUENCE-OF-RETURNS EFFECTConversely, when investors enter retirement (the decumulationstage), they tend to take regular withdrawals from their portfolios.This action, when coupled with major declines in the market, placesadded stress on investors portfolios, especially if the marketdecline occurs toward the beginning of the withdrawal phase. Anadverse sequence of market returns may accelerate the depletionof investors accounts.While an appropriate balance between equities and fixed income isimportant during ones retirement years, we believe adding a riskmanagement strategy to a diversified portfolio provides a betteropportunity for prosperity in retirement than asset allocation alone.ILLUSTRATIONThe chart below tracks the historicalaccount values of two individuals,each with $1 million, one saving forretirement, and the other currentlyin retirement and withdrawing 5%of his/her initial portfolio value peryear ($50,000, distributed monthlyand adjusted for inflation). Whileboth individuals have experiencedmultiple declines in the market, theretired individual, who began takingportfolio withdrawals in 2000, ismathematically on a downwardtrajectory that may ultimately resultin portfolio depletion.QUICK LOOKRegular portfolio withdrawals combinedwith declines in the market place addedstress on retirement portfolios.For investors nearing or in retirement, it maynot be possible to ride out market storms.Adding the Milliman Managed RiskStrategy may help reduce the negativeeffects of volatility and broad marketdeclines on retirement assets.Source: Milliman Financial Risk Management LLC,1/1/00 - 12/13/13.Account value investment is based on a 70/30 allocationamong the S&P 500 Index and the Barclays U.S.Aggregate Corporate Bond Index. Performance data ishypothetical and for illustrative purposes only and is notreflective of any investment. Past performance is notindicative of future results. It is not possible to investin an index. The data shown is hypothetical and doesnot reflect or compare features of an actual investment,such as its objectives, costs and expenses, liquidity,safety, guarantees or insurance, fluctuation of principalor return, or tax features. The S&P 500 Index is acommonly used benchmark comprised of all the stocksin the S&P 500 weighted by market value. The BarclaysU.S. Aggregate Bond Index is a universally acceptedbenchmark for bond performance and is comprised ofbonds with a maturity over one year.THESE RESULTS ARE BASED ON SIMULATEDOR HYPOTHETICAL PERFORMANCE RESULTSTHAT HAVE CERTAIN INHERENT LIMITATIONS.UNLIKE THE RESULTS SHOWN IN AN ACTUALPERFORMANCE RECORD, THESE RESULTS DONOT REPRESENT ACTUAL TRADING. ALSO,BECAUSE THESE TRADES HAVE NOT ACTUALLYBEEN EXECUTED, THESE RESULTS MAY HAVEUNDER-OR OVER-COMPENSATED FOR THEIMPACT, IF ANY, OF CERTAIN MARKET FACTORS,SUCH AS LACK OF LIQUIDITY. SIMULATED ORHYPOTHETICAL TRADING PROGRAMS IN GENERALARE ALSO SUBJECT TO THE FACT THAT THEY AREDESIGNED WITH THE BENEFIT OF HINDSIGHT.NO REPRESENTATION IS BEING MADE THAT ANYACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITSOR LOSSES SIMILAR TO THESE BEING SHOWN.ACCUMULATING & DECUMULATING PORTFOLIOS$2,250,000$2,000,000$1,750,000$1,500,000Value$1,250,000Account $1,000,000$750,000$500,000$250,000$000 01 02 03 04 05 06 07 08 09 10 11 12 13 $2,054,819$1,716,209$839,211$654,959$373,89570/30 buy and hold 70/30 buy and hold w/ MMRS70/30 w/ $50,000 annual withdrawal 70/30 w/ $50,000 annual withdrawal w/ MMRS

2. Overcoming the Herd MentalityMilliman Financial Risk Management LLC 10/14On the other hand, both the accumulating anddecumulation portfolios that incorporate the MillimanManaged Risk Strategy have historically provideda smoother overall investment experience, with thepotential for a longer portfolio life over time.APPLICATIONTo mitigate the negative effects of the sequence-of-returns dilemma, the Milliman Managed RiskStrategy uses volatility management and a capitalprotection strategy. These methodologies worktogether in an effort to stabilize portfolio volatility,capture growth in up markets, and defend againstlosses during severe, sustained market declines. It isimportant to note there is no guarantee the strategywill achieve its investment objectives.Today, the Milliman Managed Risk Strategy is one ofthe more widely used risk management techniquesin the marketplace, and can be accessed at aninstitutional level, and through more than 50 retailinvestment offerings.FORESIGHTMILLIMANFINANCIAL RISK MANAGEMENTMilliman Financial Risk Management LLC is aglobal leader in financial risk management tothe retirement savings industry. Milliman FRMprovides investment advisory, hedging, andconsulting services on $150 billion in globalassets (as of September 30, 2014). Established in1998, the practice includes over 125 professionalsoperating from three trading platforms around theworld (Chicago, London, and Sydney). MillimanFRM is a subsidiary of Milliman, Inc.Milliman, Inc. (Milliman) is one of the worldslargest independent actuarial and consultingfirms. Founded in Seattle in 1947, Milliman has 55offices in key locations worldwide that are hometo over 2,600 professionals, including more than1,300 qualified consultants and actuaries.Chicago71 South Wacker DriveChicago, IL 60606+1 855 645 5462London11 Old JewryLondonEC2R 8DUUK+ 44 0 20 7847 1557for more information:MILLIMAN.COM+1 855 645 5462FOR FINANCIAL PROFESSIONAL USE ONLY. NOT TO BE DISTRIBUTED TO MEMBERS OF THE PUBLIC.Recipients must make their own independent decisions regarding any strategies or securities or financial instruments mentioned herein.The products or services described or referenced herein may not be suitable or appropriate for the recipient. Many of the products andservices described or referenced herein involve significant risks, and the recipient should not make any decision or enter into any transactionunless the recipient has fully understood all such risks and has independently determined that such decisions or transactions are appropriatefor the recipient.Any discussion of risks contained herein with respect to any product or service should not be considered to be a disclosure of all risks or acomplete discussion of the risks involved.The recipient should not construe any of the material contained herein as investment, hedging, trading, legal, regulatory, tax, accountingor other advice. The recipient should not act on any information in this document without consulting its investment, hedging, trading, legal,regulatory, tax, accounting and other advisors.The materials in this document represent the opinion of the authors and are not representative of the views of Milliman, Inc. Milliman doesnot certify the information, nor does it guarantee the accuracy and completeness of such information. Use of such information is voluntaryand should not be relied upon unless an independent review of its accuracy and completeness has been performed. Materials may not bereproduced without the express consent of Milliman.Sydney32 Walker StreetNorth Sydney, NSW 2060Australia+ 61 0 2 8090 9100 MIL_SOR_1 10/14_12/15 2014 Milliman Financial Risk Management LLC


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