Sequence Risk: Preparing to Retire in a Down Market

“You can’t time the market” is an old maxim, but you also might say, “You can’t always time retirement.”

This week, Craig Siminski, of CMS Retirement Income Planning, shares an article discussing  a strategy that may help address sequence risk — the danger of poor investment performance at the outset of retirement:

Market losses on the front end of retirement could have an outsized effect on the income you receive from your portfolio by reducing the assets available to pursue growth when the market recovers. The risk of experiencing poor investment performance at the wrong time is called sequence risk or sequence-of-returns risk.

Early Losses

A significant market downturn during the first two years of retirement could make a big difference in the size of a portfolio after 10 years, compared with having the same downturn at the end of the 10-year period. Both scenarios are based on the same returns, but in reverse order.

Dividing Your Portfolio

One strategy that may help address sequence risk is to divide your retirement portfolio into three different “baskets” that could provide current income, regardless of market conditions, and growth potential to fund future income. Although this method differs from the well-known “4% rule,” an annual income target around 4% of your original portfolio value might…

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Craig Siminski is a CERTIFIED FINANCIAL PLANNER™ professional, with more than 22 years of experience. His goal is to provide families, business owners, and their employees with assistance in building their financial freedom.

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