Sequence of Returns Risk
Protecting Your Retirement From The Unpredictable
As you near retirement, it’s important to consider the risks that could impact the longevity of your savings. One of the most significant risks is sequence of returns. In simple terms, the sequence of returns refers to the order in which you experience investment returns.
While market fluctuations are normal, experiencing negative returns early in retirement can significantly impact your long-term financial goals. This is because when you withdraw money from your retirement accounts to fund your expenses, you sell investments at a potentially low point in the market. If you’re forced to sell off a significant portion of your assets to meet your financial needs during a market downturn, you may miss out on future market gains when the market eventually rebounds.
To make matters worse, the compounding effect of losses can be challenging to recover from. For example, if you experience a 20% loss in one year, you need a 25% return the following year to break even. And if you’re withdrawing funds from your portfolio during this time, you’ll need an even higher return to cover your expenses and get back to where you started.
So, how can you protect yourself from the risk of sequence of returns? One strategy is to diversify your retirement portfolio. Investing in a mix of stocks, bonds, and other assets can help reduce your exposure to market volatility. Consider incorporating guaranteed income products, such as annuities, into your retirement plan. These products provide a predictable stream of income, which can help cover your expenses and reduce the need to sell off assets during a market downturn.
It’s important to work with a financial advisor who can help you create a retirement plan that considers the sequence of returns risk. By assessing all the potential risks and implementing a diversified portfolio that aligns with your goals and risk tolerance, you can help ensure a more secure and comfortable retirement.