Final answer:
Sequence of return risk is highest during the early years of retirement because market downturns can severely impact the portfolio when withdrawals are being made. Investment risk levels should evolve from high in the early career phase to more conservative as retirement approaches to protect funds for later use.
Step-by-step explanation:
The concept of sequence of return risk is most relevant to retirees, particularly when considering how investment returns can impact the longevity of a retirement portfolio. This risk is highest during the early years of retirement because withdrawals are made from the savings to fund retirement expenses. If significant market downturns occur early in retirement, and an individual is making withdrawals at the same time, it can greatly reduce the overall portfolio balance that will be needed for the remainder of retirement.
The investment risk level throughout one's life often changes as individuals transition from the accumulation phase to the distribution phase of their lives. During the early part of a career, one's investment risk level can be higher because there is more time to recover from potential market downturns. However, as one approaches retirement, the risk level should generally decrease to protect the savings that will be needed in retirement. Identifying the appropriate risk level based on the stage of life is a key aspect of financial planning.