“Retirement income will last longer if you plan for market volatility. It’s critical to protect your money against “sequence of returns” risk.“- Dave Barr.
The timing of withdrawals from your retirement account poses one of the most significant risks to your retirement success. For instance, taking money out of one of your accounts during a bear market will cost you more than spending the same amount during a bull market. Retiring during a bear market may mean that your retirement account never recovers.
Conversely, if you are fortunate enough to retire during a bull market, your portfolio might grow large enough to weather a subsequent market downturn. While it is impacted somewhat by pure luck, it’s possible to reduce sequence risk with solid planning.
Can you afford volatility in your portfolio?
Several approaches may be employed to manage the sequence of returns risk. One of these is drastic reductions in spending. Most retirees equate this measure with downgrading their lifestyles. Typically if you have a retirement portfolio that has not been “de-risked,” cutting back on expenses may be the only way to make it through a market downturn.
However, a retirement where you are barely scraping by doesn’t appeal to most people. If you’d prefer to maintain your current lifestyle when you stop working, re-assessing your current investment matrix and reducing volatility as much as possible is necessary. Only a portfolio with zero volatility completely removes the sequence of returns risk.
How can you reduce retirement savings volatility?
Safe money products. “Safe money” products encompass various financial vehicles, including annuities, bonds, and life insurance. Balanced portfolios often include a percentage of safe money products to help buffer against volatility.
For example, because they don’t correlate to the stock market, income annuities may be an excellent choice to help mitigate the sequence of returns risk. Adding an annuity to create a predictable income stream may offset the strain of withdrawals.
What is a rising equity glide path?
Another common volatility reduction technique is the “rising equity glide path.” Using this approach, a person enters retirement with an equities allocation lower than typically recommended. Stock allocation is then slowly increased over time. The equity glide path method can substantially reduce vulnerability to stock market declines that tend to be most harmful in the early years of retirement.
Other ways to mitigate against volatility
Your financial advisor may also suggest products such as financial derivatives or income riders to help you avoid a sequence of returns risk.
You can use such products to determine how low your portfolio can fall. In return for this protection, you will likely sacrifice potential upside.
The last word. The sequence of returns risk is a genuine threat to your retirement income that you must address in your comprehensive financial plan. It is possible to take measures to ensure more significant degrees of protection for your wealth. A competent advisor experienced in the distribution phase of retirement will help you discover the best ways to protect your portfolio from market mood swings and ensure your money lasts as long as needed.