What is sequence of returns risk in simple terms?

Sequence of returns risk is the danger that getting bad investment returns early in your retirement, especially when you're taking money out of your savings, will cause your money to run out sooner than expected. The *order* of returns matters more than the average return.

How does sequence of returns risk affect retirement?

It significantly affects retirement by forcing you to sell more of your investments at low prices during market downturns. This depletes your principal faster, leaving less money to recover when the market eventually rebounds, potentially shortening how long your savings will last.

What is the 4% rule and how does it relate to sequence of returns risk?

The 4% rule suggests you can safely withdraw 4% of your initial retirement portfolio value each year, adjusted for inflation, and have a high probability of your money lasting 30 years. However, a rigid 4% rule can be vulnerable to sequence of returns risk if a significant market downturn occurs early in retirement, as it doesn't account for adjusting withdrawals during poor market performance.

What is the "retirement red zone"?

The "retirement red zone" refers to the period roughly five years before and five years after you retire. This 10-year window is particularly vulnerable to sequence of returns risk because market downturns during this time can have a disproportionately negative impact on your long-term financial security.

How can I protect my retirement from sequence of returns risk?

You can protect your retirement by using strategies like a cash bucket (keeping 1-3 years of expenses in cash), a bond tent (increasing bond allocation around retirement), delaying Social Security, considering annuities for guaranteed income, and employing dynamic withdrawal strategies that adjust spending based on market performance.

Should I work with a financial advisor for sequence of returns risk?

Yes, working with a financial advisor is highly recommended. They can help you assess your risk, create a personalized plan, implement mitigation strategies, and monitor your portfolio, providing expert guidance to navigate the complexities of retirement income planning and sequence of returns risk.

What is "dollar-cost ravaging"?

Dollar-cost ravaging, also known as reverse dollar-cost averaging, describes the negative impact of making regular withdrawals from a declining investment portfolio. Because you're selling assets when their value is low, you have to sell more shares to get the same amount of money, which further reduces your principal and makes it harder for your portfolio to recover.

Sequence of Returns Risk: Retirement Guide | One Percent…