Broker Check

Beware Sequence Risk When Retiring in a Bear Market

October 24, 2022

Beware Sequence Risk When Retiring in a Bear Market

Stocks have officially entered a bear market, which poses a unique risk to anyone who is retiring now or retiring soon. Erin Kennedy and Tom O’Connell discussed sequence risk in a bear market and how to navigate it, giving you the best chance for peace of mind during your retirement. Here you’ll learn more about sequence risk and the specific steps you can take to provide a stable income for yourself during your retirement years.

What Is Sequence Risk

The sequence risk you might face as a retiree or soon-to-be retiree is the order in which you’re getting your returns. In the 5 to 10 years preceding retirement and the first 5 to 10 years of your retirement, also referred to as the red zone, negative returns can have a significant impact on your portfolio.

You could have the same average returns, the same retirement distributions, and the same amount of savings, but run out of money over a decade sooner because of sequence risk. Having the negative returns in the early years of your retirement could cause you to run out of money much sooner.

How to Handle Sequence Risk

Obviously, you have no control over the market and neither does anyone else. This doesn’t mean you have to despair even if you’re retiring in a bear market. Here are some steps you can take to handle the sequence risk:

· Tap into your savings first

· Rein in spending

· Weigh your Social Security options

· Plan for stable income

· Consider a Reverse Mortgage

Instead of withdrawing from your portfolio, we recommend tapping into your savings first while returns are down. This helps you preserve more of your principal investments and extends the lifetime of those assets. If possible, rein in your spending. The less you withdraw during bear market years, the better your portfolio can recover.

It’s also important to weigh your Social Security options. While waiting to receive Social Security benefits means you’ll get more benefits, it might mean having to tap more of your portfolio right away. If applying for benefits earlier helps you preserve your portfolio, it could be worth the tradeoff for lower Social Security benefits. But the most important thing you can do is plan for a stable income during retirement.

Creating Guaranteed Income Streams

The best way to combat sequence risk is to use guaranteed income streams during your retirement. Typically, this is some type of annuity, such as a fixed or indexed annuity. An annuity(ies) allows you to create a stable income stream that allows you to cover your living expenses reliably without having to worry.

If you have questions about retiring in a bear market, purchasing an annuity, or how to create an income distribution plan during retirement, talk to our financial advisor. Retiring in a bear market is not ideal, but there are ways to minimize the risks to your portfolio and help you enjoy your retirement. Having an annuity that provides a stable income can give you that peace of mind you need right now.