As you prepare for retirement, one of the most important considerations is how to ensure that your nest egg lasts throughout your lifetime and you don’t outlive your money. One risk that many may overlook is sequence risk, which occurs when you face poor market returns early in retirement while you’re drawing down your savings. This can cause long-term damage to your portfolio, leaving you vulnerable later on in life.
But there’s good news. By taking some simple, actionable steps, you can minimize sequence risk and set yourself up for a stable, long-term retirement. Here’s how:
1. Diversify Your Investments
A well-diversified portfolio is one of the most effective ways to protect against sequence risk. Diversification ensures that not all of your assets are tied to the performance of one market or sector. Spread your investments across various asset classes, such as stocks, bonds, real estate, and international assets, to reduce the impact of a downturn in any one area.
2. Consider a Dynamic Withdrawal Strategy
Rather than taking a fixed percentage from your portfolio each year, you may want to investigate adjusting your withdrawals based on market performance. If markets are down, you may decide to withdraw less or even skip withdrawals for a period of time.
3. Maintain a Cash Reserve
Keeping a cash reserve or liquid portion of your portfolio can help you weather market downturns without needing to sell investments in the midst of volatility. This reserve acts as a buffer, allowing you to draw from it during tough market years while keeping your long-term growth assets intact.
4. Focus on Income-Producing Investments
Incorporating income-generating investments, such as dividend-paying stocks, bonds, or real estate, into your retirement portfolio can help provide a steady stream of cash flow. This income can help reduce the need to sell off assets in a down market, mitigating sequence risk while giving you predictable income during retirement.
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5. Revisit Your Asset Allocation Regularly
As you approach and enter retirement, it’s important to reassess your portfolio’s risk level. While stocks offer growth potential, they can also be volatile. In retirement, shifting to a more balanced mix of stocks and bonds can reduce the impact of market fluctuations. Be sure to review and adjust your asset allocation regularly to match your evolving needs.
6. Plan for Longevity
Retirement may last 30 years or more, so it’s critical to plan for the long haul. Factor in a conservative estimate for how long your funds need to last. By assuming that you may live longer than expected, you can set up a more robust strategy that minimizes the risk of outliving your savings.
7. Work with a Financial Professional
A financial professional can help you design a strategy that takes sequence risk into account and creates a plan tailored to your specific situation. Advisors can also help you navigate the complexities of taxes, required minimum distributions (RMDs), and other factors that influence the long-term health of your nest egg.
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