Now, this isn’t the most fun game to play, but if you had to guess what the biggest risk you’ll face in retirement was, what would you say? Maybe you’d guess healthcare costs or higher taxes. Perhaps you think the biggest risk you’re concerned about is Social Security.
But none of those are the largest risk you’ll face. The biggest risk to your retirement is called sequence of returns risk – and it can have a devastating impact on your retirement savings.
What Is Sequence of Returns Risk?
So, what is the sequence of returns risk, anyway? Sequence of returns risk refers to the danger of retiring during a stock market downturn. If the stock market is falling during the first few years of your retirement, the combination of stock market losses and the need to withdraw money to pay for retirement could deplete your nest egg. And unfortunately, even if the market eventually recovers, your portfolio may not have time to bounce back.
Without the right strategy, it’s possible you could find yourself selling investments at a loss just to cover your living expenses.
The Challenge of Required Minimum Distributions (RMDs)
Once you reach a certain age, the government requires you to start withdrawing from your tax-deferred retirement accounts. These required minimum distributions (RMDs) force you to sell investments regardless of market conditions. If your portfolio is down when this happens, those losses become locked in, and you lose the opportunity to recover.
One way to minimize the impact of RMDs is to develop a proactive withdrawal strategy before you reach retirement age. Planning ahead can help you avoid unnecessary tax burdens and market-driven losses.
The Problem With Relying on Simple Withdrawal Rules
Many retirees have been told to follow the 4% rule, which suggests withdrawing 4% of their portfolio annually to ensure their savings last. However, this rule doesn’t account for market fluctuations. In years when the market is down, withdrawing at a fixed rate could accelerate the depletion of your funds.
A better approach is to remain flexible with withdrawals. During market downturns, withdrawing less can help your savings last longer, while in strong years, you may be able to withdraw a little more. Having a diversified withdrawal strategy is key to making your money last.
How to Protect Yourself
The good news is that you have more control over your retirement security than you might think. Here are a few strategies to help safeguard your savings:
- Rebalance Your Portfolio: Many people set up their retirement investments and then forget about them. Over time, market shifts can create imbalances, increasing your risk exposure. Regularly reviewing and adjusting your investment mix can help ensure you’re prepared for different market conditions.
- Consider a Roth Conversion: Unlike traditional IRAs and 401(k)s, Roth accounts allow tax-free withdrawals in retirement and aren’t subject to RMDs. Converting some of your savings to a Roth IRA could provide greater flexibility and reduce the impact of sequence risk.
- Diversify Your Income Streams: Relying on a single income source in retirement can be risky. A well-rounded plan might include Social Security, annuities, bond ladders, dividend-paying stocks, and other income-generating assets. The goal is to have multiple sources of reliable cash flow so you’re not entirely dependent on the stock market.
- Use Buffer Assets: Holding a cash reserve or other stable assets can help you avoid selling investments at a loss during downturns. Having a few years’ worth of living expenses in safer accounts can give your portfolio time to recover.
Build A Strategy That Prevails
A successful retirement isn’t just about how much you’ve saved—it’s about taking steps to turn your savings into sustainable income. By planning ahead, diversifying your income sources, and staying flexible with withdrawals, you can build a retirement strategy that withstands market fluctuations and gives you the confidence to enjoy your golden years.
Want to ensure your retirement plan is built to last? Let’s talk about how you can secure your financial future today 952-460-3290.
