Target Date Investing

A Different Perspective on Sequence-of-Returns Risk Around Retirement

Jerome Clark, Portfolio Manager, Multi-Asset
Kim DeDominicis, Portfolio Manager, Multi-Asset
Wyatt Lee, Portfolio Manager, Multi-Asset
Executive Summary
  • Investors saving for retirement must consider a range of factors, including the objectives they wish to achieve and the risks they are willing to take. One factor that often receives significant attention is sequence‑of‑returns (SoR) risk—the concern that portfolio losses around retirement could impact the ability to support postretirement income needs.
  • We recognize that investors may have different retirement objectives, resulting in different risk priorities. While some investors may rationally prefer a strategy that limits the variability of account balances around retirement, most are focused on achieving adequate, sustainable income streams during retirement.1
  • In target date investing, it is critical to align glide‑path design with investors’ objectives. To understand the potential trade‑offs, it is not only important to evaluate the magnitude of potential losses, but also to view that potential in the context of the full investment life cycle.
  • For investors with a longer‑term focus on longevity risk, the benefits of maintaining a growth‑oriented glide path in their accumulation phase could meaningfully outweigh the potential negative impact of a large market decline close to or soon after retirement.
  • Historically, equities have tended to generate higher intermediate‑ and long‑term returns compared with fixed income and cash assets. In our view, the benefits of capturing this equity risk premium outweigh the potential impact of SoR risk. Our analysis suggests that most investors could have achieved higher asset balances at and into retirement by following higher‑equity glide paths, even after experiencing large market declines close to retirement.

Evaluating the Impact of SoR Risk

To examine the trade‑offs required to manage SoR risk, we can measure possible outcomes using different glide paths. Our analysis here uses the benchmark glide paths represented in the S&P Target Date Indexes. This family of indexes is designed to reflect average asset allocations in the universe of glide paths currently available for different target dates, based on a survey of target date providers active in the market. For each available target date, S&P also maintains two sub‑style indexes―the S&P Target Date To Indexes and the S&P Target Date Through Indexes.

To understand the potential trade‑offs, it is not only important to evaluate the potential magnitude of losses, but also to view that potential in the context of the full investment life cycle and the financial outcomes investors are seeking. This approach allows us to identify the point at which a rational investor might be indifferent between the outcomes of two different glide paths. In other words, given the potential performances of the S&P indexes in the accumulation phase, how big of an equity bear market would it take to equalize the values of two portfolios tracking those same indexes?

"Through" Led to a Higher Portfolio Balance Than "To"

The performance shown on this page does not reflect the deduction of investment fees or expenses. Past performance cannot guarantee future results. This material is based on an historical example; different time periods would yield different results. There is no assurance the pattern will be repeated in the future.

Chart shows growth of 100,000 USD invested in the S&P Target Date Through 2020 Index and the S&P Target Date To 2020 Index on December 31, 2007. Figures include changes in principal value, reinvested dividends, and capital gain distributions.

All examples are for illustrative purposes only and do not represent the performance of a particular investment. It is not possible to invest directly in an index.

Source: S&P Dow Jones Indices LLC. Analysis by T. Rowe Price.

From this starting point, we can calculate the equity loss required to make the outcomes equal for both portfolios as they stood on December 31, 2017. In this analysis, we focus on portfolio balances because as a simplifying assumption the current balance can be viewed as the present value of future retirement spending. If we assume that an individual has a set spending strategy, then, all else being equal, a higher

balance potentially means that he or she could spend the same amount over a longer period (i.e., the stream of income would last longer) or spend more over a shorter horizon.

In both cases, the SoR risk resulting from market volatility near retirement could have a significant impact on retirement income. However, unless the equity decline were even larger than in the hypothetical scenarios outlined above, the more conservative “To” investor would not enjoy a withdrawal advantage over the more growth‑oriented “Through” investor. From an outcome‑oriented

perspective, the benefit of capturing the equity risk premium over a long investment horizon potentially would outweigh the impact of SoR risk.

A Surplus That Would Endure in Harsh Market Scenarios

Hypothetical Situations and Outcomes In a Flat Fixed Income Market

Hypothetical Situations and Outcomes In a Flat Fixed Income Market

Equity = S&P Target Date Through and To Equity Portfolios: S&P 500, S&P 400, S&P 600, S&P Developed Ex-U.S. BMI Net Total Return, S&P Emerging BMI Net Total Return, Dow Jones U.S. Select REIT Total Return, S&P Developed Ex-U.S. REIT Net Total Return.

Fixed Income = S&P Target Date Through and To Fixed Income Portfolios: S&P U.S. Aggregate Bond Index TR, S&P U.S. Treasury Bond 0 -1 Year Index Total Return, S&P U.S. Treasury TIPS Index TR, S&P 500 High Yield Corporate Bond Index.

Source: S&P Dow Jones Indices LLC. Analysis by T. Rowe Price.

As investors approach retirement, it is not surprising that they may become more sensitive to the risk of a short‑term market decline. However, a narrow focus on risk of loss does not take into account the full range of risks that retirement investors face. We believe it important to evaluate SoR risk in a broader, more holistic context, especially if we consider longevity risk and the fact that investors will likely need their income streams to last decades into retirement.

For investors who have had the opportunity to accumulate savings over the course of long working careers, higher-equity glide paths historically could have delivered higher retirement balances in the vast majority of long‑run periods, even after taking SoR risk into account. We believe investors would be wise to consider this experience when choosing target date strategies.

Learn More

White Paper


Related Videos

Glide Paths Matter

Portfolio manager Wyatt Lee discusses the impact of the glide path approach on retirement income goals and the importance of putting the potential for loss into the context of the full savings horizon

What It Is and Why It Matters

Portfolio manager Wyatt Lee defines sequence of returns risk and discusses investor concerns about the impact of losing money at or near retirement on their ability to sustain retirement income

1T. Rowe Price recently surveyed almost 300 defined contribution plan sponsors to understand their views on these complex issues. Please see: Lorie Latham, Advancing the Way We Think About Perceptions of Risk and Achieving Outcomes, T. Rowe Price, July 2018. Available on the Web at:

Important Information

This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.

The views contained herein are those of the authors as of November 2018 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

This information is not intended to reflect a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision.

Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.

Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal. All charts and tables are shown for illustrative purposes only.

T. Rowe Price Investment Services, Inc., distributor, and T. Rowe Price Associates, Inc., investment advisor.

© 2018 T. Rowe Price. All rights reserved. T. Rowe Price, INVEST WITH CONFIDENCE, and the bighorn sheep design are, collectively and/or apart, trademarks of T. Rowe Price Group, Inc.

Tap to dismiss

Manage Subscriptions

Unsubscribe All

Manage your watched Funds and Insights subscriptions here.


Change Details

Congratulations! You are now registered.

Begin watching and receiving email updates for:


Sign in to manage your subscriptions and watch list.



Latest Date Range
Download Cancel

This content is restricted for Institutional Investors use only. We were not able to validate your status as an Institutional Investor with the information you provided at registration.

Please contact the T. Rowe Price Team with questions or to revise your status.


You will need to accept the Terms & Conditions again.


You have updated your email address.

An activation email has been sent to your new email address from T. Rowe Price.

Please click on the activation link in order to receive email updates.


You have an existing account

Click OK to view your subscriptions and watch list.


Confirm Cancel