Many investors approaching retirement face the threat of sequence of returns risk, a phenomenon that is often misunderstood and overlooked. This risk arises from poor investment returns combined with withdrawals, particularly in the early years of retirement. This can lead to a significant reduction in one’s retirement nest egg over time.
Certified financial planner Collin Lyon emphasizes that the investment returns and withdrawal timing during the early years of retirement can significantly impact the financial security of retirees for the next 30 years. This makes it crucial for investors to be aware of the potential consequences of sequence of returns risk.
Financial advisors suggest several strategies to mitigate the impact of sequence of returns risk. One approach is to adjust portfolio allocations as retirement approaches, moving from higher-risk assets to less volatile investments such as bonds. Diversifying across different asset classes can also help reduce the impact of market volatility.
Keeping a six-month emergency fund and a “war chest” for living expenses can help retirees avoid selling assets during market downturns. Financial advisor Jonathan Bednar II recommends having five years of expenses in fixed-income assets to weather market volatility during periods of high sequence risk.
Flexible withdrawal strategies can provide a buffer against sequence of returns risk. By adjusting withdrawal rates based on market performance, retirees can preserve their portfolio’s core during periods of negative returns. This approach can help safeguard their financial security in the long run.
While strategies such as diversification, building a financial safety net, and implementing flexible withdrawals can help mitigate sequence of returns risk, it is essential for retirees to remain vigilant against potential threats to their retirement nest egg. By staying informed and proactive, investors can navigate the complex landscape of retirement planning more effectively.
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