Retirees entering their golden years often face a significant financial concern known as sequence risk. This risk refers to the potential negative impact that market downturns early in retirement can have on their long-term financial security. However, there are several strategies retirees can employ to mitigate sequence risk and safeguard their retirement income.

  1. Bucketing Strategy:

One effective method of combating sequence risk is the bucketing strategy, which involves dividing retirement savings into different buckets based on time horizon and volatility. The first bucket, typically comprised of lower return, less volatile investments like cash and bonds, covers immediate spending needs for the next few years. The second bucket consists of more balanced investments, while the third bucket holds higher-return assets like equities for long-term growth. By segregating funds based on time horizon, retirees can weather short-term market fluctuations without jeopardizing long-term financial goals.

  1. Guard Rails Approach:

Another strategy is to establish guard rails or predetermined thresholds for portfolio withdrawals based on market performance. If the portfolio value falls below a certain level, retirees may temporarily reduce withdrawals or adjust spending habits to preserve capital. Conversely, if the portfolio experiences significant growth, retirees can increase discretionary spending within predefined limits. This flexible approach helps retirees adapt to changing market conditions while maintaining financial stability throughout retirement.

Combating Sequence Risk

  1. Maximizing Equity Exposure:

While conservative investments provide stability, retirees should also consider maximizing equity exposure for long-term income needs. Despite short-term market volatility, equities historically offer higher returns over extended periods, making them essential for sustaining purchasing power and funding retirement expenses over the long term. By maintaining a diversified portfolio with a significant allocation to stocks, retirees can capitalize on growth opportunities while mitigating sequence risk.

All or a combination of the above strategies will reduce sequence risk which can pose a threat to retirees’ financial security, particularly in the early years of retirement. Ideally this should be done in line with a long-term Lifestyle Financial Plan which takes the clients unique situation into account.

Combating Sequence Risk

Today retirement can last 40 years so the need for proper planning cannot be over emphasised. Doing this alone is difficult even for the most financially astute investor so getting the help of a qualified adviser will ensure that retirees can enjoy financial peace of mind and pursue their retirement dreams with confidence.

Dirk Groeneveld, Certified Financial Plannert. 

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