Times of market volatility are never pleasant, but they pose a particular threat to you as you near and enter retirement. The state of the market just before you retire can impact your returns throughout your entire retirement. This is because once someone takes withdrawals from a fund’s underlying investments, they expose themselves to sequence of returns risk.
It’s important to beware of sequence of returns risk as you enter retirement because the state of the market at the time of your retirement is not within your control. Even if you’ve saved diligently your whole working life, a market downturn around the time if your retirement can have a serious negative impact on your wealth. In fact, two retirees with identical wealth and long-term market averages in retirement can have very different financial outcomes depending on the state of the economy when they begin retirement.
Someone retiring during a bear market might see their portfolio recover as the market does, but they will also see a reduction in the overall return of their portfolio because of how much they had to withdraw early on when prices were down. Withdrawing funds while your portfolio loses value can negatively affect your returns throughout retirement.
If someone with a similar portfolio retires during a bull market, they can take withdrawals of fewer equities and lower their risk of causing smaller returns throughout retirement. This is because there are more equities left to generate returns later on.
Retirement shouldn’t be a time of anxiety or worry, it should be a time when you feel financially secure and can enjoy the money you’ve worked hard to earn for decades. There are ways to protect against sequence of returns risk other than delaying your retirement. If you’ve saved and invested, you can help to protect what you’ve earned by moving away from higher risk stocks, diversifying your portfolio, and developing strategies to help survive volatile markets.
As you enter retirement, beware of sequence of returns risk. Before you start withdrawing from your retirement accounts to boost your income, talk to a financial advisor about shifting to a lower-risk portfolio. Our professionals can help you create a plan that minimizes risk as you enter and live in retirement.