In a June 25th Grand Rapids Business Journal column, Anastasia Wiese, JD, CFP® described how current uncertainties may expose retirees to “sequence risk,” or the risk of encountering negative investment returns early in retirement. Specifically, the random sequence — or order — in which you earn your returns early in retirement can impact your lasting wealth.
How does sequence risk work, and how can you manage it if it happens to you? Simply put, a retirement portfolio that happens to experience positive returns early in retirement will outlast an identical portfolio that must endure negative returns early in retirement, even if their long-term rates of return end up the same.
This is because, in a bear market, a retiree may need to sell shares at low prices, which means they will have to sell more of them to withdraw the same amount of cash. Even though the market is expected to eventually recover and continue upward, this means your portfolio can’t bounce back as readily as when you were adding shares, or at least not taking them away.
You cannot predict whether you’ll encounter sequence risk early in retirement, but you can take steps to manage it if it occurs. Possibilities include working a little longer (at least part-time), spending a little less, and/or tapping assets other than your stock holdings. A financial advisor can help you arrive at an appropriate solution, before, during, and after this pivotal time in your financial journey.
To learn more, you can read Anastasia’s article here.
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