Many retirees focus on their portfolio’s average return over time, assuming that a steady rate of return will keep their savings intact. However, the order in which investment gains and losses occur can have a dramatic impact on financial security, and consider monitoring the sequence of those returns.
Why Sequence of Returns Risk is a Major Concern
Retirees who experience early losses may run out of money much sooner than those who start retirement in a strong market. This risk is most severe in the first decade of retirement, making early planning essential.
How Market Volatility Affects Retirement Savings
In retirement, withdrawals during a downturn permanently reduce the portfolio’s value. Two retirees with the same savings but different market conditions can experience drastically different outcomes. Those facing losses early in retirement may need to adjust their spending or risk outliving their savings.
Key risks include:
- Selling Low: Withdrawals from investments that have lost value leave less capital for future growth.
- Longer Recovery Time: A smaller portfolio means future gains have less impact.
- Inflation Pressure: Rising costs can force larger withdrawals, accelerating depletion.
Using the Bucket Strategy for Stability
The bucket strategy helps retirees manage their savings by dividing assets into three categories based on time horizon and risk tolerance.
- Short-term (2-5 years): Cash and bonds to cover immediate expenses, providing liquidity and stability.
- Intermediate-term (5-10 years): Bonds and conservative stocks for moderate growth while balancing risk.
- Long-term (10+ years): Stocks for higher returns, allowing investments to grow over time.
This approach makes sure retirees can draw from stable assets in downturns while giving long-term investments time to recover. By reducing the need to sell stocks during market declines, it helps maintain financial security and peace of mind throughout retirement.
Adjusting Withdrawals Based on Market Conditions
A rigid withdrawal plan increases risk. Instead, you should adjust withdrawals based on market performance. When investments decline, reducing withdrawals can slow portfolio depletion. In strong years, withdrawing slightly more may be possible.
The guardrail strategy sets upper and lower spending limits, allowing you to adjust without drastic lifestyle changes, and allow your savings to last longer.
Diversifying Investments for Protection
A well-balanced portfolio includes a mix of stocks, which offer long-term growth potential, and bonds, which provide stability and a steady income stream. Additionally, alternative investments such as real estate, commodities, or dividend-paying assets can add another layer of security, helping to cushion against market volatility.
Regularly rebalancing the portfolio assures that asset allocation remains aligned with retirement goals, preventing overexposure to any single investment type and maintaining a sustainable risk level.
Creating Reliable Income Sources
A stable income stream is essential in retirement to reduce reliance on investment withdrawals, especially during market downturns. Social Security benefits can provide a foundation, and delaying claims can significantly increase monthly payments. Annuities offer guaranteed lifetime income, helping retirees manage longevity risk by making sure they do not outlive their savings.
Other income sources, such as rental properties or pensions, add financial stability by providing consistent cash flow regardless of market conditions. By securing multiple income streams, retirees can reduce withdrawal pressure on investment portfolios, allowing assets to grow and last longer.
Managing Taxes to Keep More Savings
Minimizing taxes ensures more money stays in the portfolio for long-term use. Following tax-efficient withdrawals can preserve more retirement funds, and some of the strategies include:
- Withdrawing from taxable accounts first to delay taxes on retirement accounts.
- Using Roth conversions to lower future required minimum distributions (RMDs).
- Offsetting gains with tax-loss harvesting to reduce taxable income.
Since markets are unpredictable, you should regularly review and adjust their plans. We, at South Star Wealth Management, understand this sequence of risks and can offer you professional guidance in navigating these shifts safely with maximum returns after your retirement. Schedule a meeting with our experts today!