Market performance is unpredictable, and as you approach retirement, these fluctuations can have significant consequences. Careful planning and sound financial advice are essential during this critical period.
What Is Sequencing Risk?
The “retirement risk zone” refers to the 5-10 years around retirement when savings are most vulnerable to market downturns. Unlike younger investors, retirees may face compounding losses from early negative returns while drawing down their savings, known as sequence of returns risk.
How Sequencing Risk Impacts Retirement
For example, if you retire with $1 million and withdraw $40,000 annually, an initial 15% market drop followed by gains of 5%, 10%, and 20% over the next three years can still deplete your savings faster. Conversely, retiring in a bull market can offset withdrawals, preserving your balance.
Strategies to Mitigate Sequencing Risk
- Diversify Investments: Spread assets across classes like rental properties or fixed-income investments to reduce volatility.
- Adjust Spending: Reduce expenses to align with minimum drawdowns and preserve savings.
- Delay Retirement: Extend work to allow your portfolio time to recover.
- Part-Time Work: Supplement income while staying socially and mentally active.
Stay Flexible
While sequencing risk can’t be avoided, preparation and adaptability are key. Consult your financial adviser to tailor strategies to your situation and safeguard your savings for a secure retirement.
This information is of a general nature only and has been provided without taking account of your objectives, financial situation or needs. Because of this, you should consider whether the information is appropriate in light of your particular objectives, financial situation and needs. For further information on anything that has been discussed in this article, please consider seeking qualified and professional advice.
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The Wealth Mentoring Group 