Sequence Risk: How Your Retirement Withdrawals Are Affected
You cannot time the market but you can time your retirement withdrawals. Sequence risk is the potential danger to periodically withdrawing funds from your retirement savings just as the market is experiencing negative performance. Individuals who are about to retire face the greatest sequence risk. Poor investment performance in the beginning of retirement while simultaneously withdrawing funds can harm the chances of a portfolio recovering. Thankfully, there are ways to address this issue which can minimize this type of risk.
Keeping a well-diversified portfolio can mitigate sequence risk. Having a mix of equites & fixed income as well as investing in various asset classes (US equities, International equities, Emerging Market equities, etc.) can give you a variety of options of where to withdraw money from. If, for example, US equities were to experience a downturn and International equities were on the rise, withdrawing money from International equities would be the way to go as it would give US equities time to recover.
Just like an emergency fund, one should keep a fair amount of cash for retirement expenses in the event of a market downturn. Keeping a portion of your money in cash or potentially in very short-term bonds can help you avoid the need to withdraw from assets that are experiencing negative performance. While the amount of cash you can keep is, to an extent, a personal preference, one should be wary of keeping too much in cash as being out of the market for too long presents a separate type of risk.
Ultimately, there is no perfect method to manage sequence risk. However, maintaining a disciplined approach to portfolio management can help mitigate this type of risk. Having a financial advisor to address these issues can remove the stress of worrying where to withdraw money from.
Weingarten Associates is an independent, fee-only Registered Investment Advisor in Lawrenceville, New Jersey serving Princeton, NJ as well as the Greater Mercer County/Bucks County region. We make a difference in the lives of our clients by providing them with exceptional financial planning, investment management, and tax advice.