How to Avoid Sequence of Returns Risk

Imagine you’ve finally reached your retirement savings goal. You’re ready to stop working and enjoy retirement, maybe with more travel, time with family or pursuing new hobbies and interests.

But there’s a catch: When you want to retire, the stock market is down. Way down. That means your account value is also lower. How much is your retirement nest egg now at risk?

That scenario, which occurs with regularity, is known as sequence of returns risk.

“This is the danger – that there will be a big market downturn just as you’re getting to your planned retirement date,” says Cristina Guglielmetti, a certified financial planner at Future Perfect Planning in Brooklyn, New York.

You can think of sequence of returns risk as a roller-coaster ride for your savings. If your investment returns are poor early in retirement or when you’re withdrawing funds, it can deplete your savings more quickly.

Even if your investments recover later, the initial losses can harm your long-term financial health. Here are a few ways to avoid sequence of returns risk:

• Plan for market downturns.
• Use a gradual allocation path.
• Remember losses are linear, but required gains are exponential.
• Keep two years of income in cash.
• Reduce risk by looking beyond the short term.