Mo Money's Building Wealth Blog

So, you’ve worked hard and saved hard and it’s time for you to retire.  Congratulations!  You’re all set to follow the 4% rule and you’re fairly confident that you positioned yourself such that your money will last forever.  The coast is clear right?  Well, maybe not.  There’s something that you need to be wary of and it’s called Sequence of Returns Risk.

Sequence of Returns Risk happens when you need to withdraw from your portfolio during a down market – i.e. when your shares are valued less so the timing forces you to liquidate more of them to meet your 4% expense budget.  This in turn leaves a lesser amount of assets in your portfolio to generate future interest and returns.  This is particularly troublesome if that market dips during the first few years of your retirement.  That could really take a big bite into your nest egg and put you at risk for your funds expiring before you do.

There are a few things that you can do to help avoid Sequence of Returns Risk:

• Save more for retirement than you plan on needing so that you have a comfortable cushion.
• Have a balanced portfolio that allows you to draw from cash if the market dips down.
• Be flexible with your budget.  Spend less than 4% in down years.
• Retire before you are forced to so that you can jump back into the workforce if necessary.
• Consider a side hustle or part time job.
• Investigate having some percentage of your portfolio in a fixed annuity that isn’t tied to market fluctuations or interest rates.