How to protect your nest egg from the risk of a “sequence of returns”

Tom King CFP, CLU, AEP is the principal registrant of King Financial Partners at State College

Even if you’ve saved diligently and invested prudently, every investor knowingly takes the risk that well-crafted plans may change, but it’s hard to feel really ready – at least emotionally – to start dipping into a portfolio, especially if you do. anticipate entering a bear market.

This is called “return sequence risk” – the possibility that a market decline as you approach your retirement date could affect your future purchasing power. Timing is important because you may not have the ability or the time to compensate for the losses incurred just before retirement. It becomes even more difficult if these portfolio losses occur after your retirement since you no longer have the possibility of replenishing your retirement assets by saving part of your salary.

The good news is that the sequence of returns is a manageable risk – if you implement a well thought out plan.

Investors who want to guard against the risk of sequence of returns have a number of options. What is right for you will depend on your overall asset mix and allocation, your specific risk tolerance and other personal factors.

That said, here are several strategies that can serve as a starting point for the conversation:

Build a tampon

It is possible to mitigate the risk of the return streak by determining how much you need in retirement to cover your basic living expenses, such as mortgage payments, groceries, utilities, insurance, transportation and health care, then creating a wallet to safely cover these expenses. This can include sources of income, in addition to your social security, such as pensions, fixed income assets, bond scales and, in a few relevant cases, annuity payments.

If these options don’t appeal to you, you can protect yourself further by holding a cash cushion equal to a set number of months of living expenses. Use this cushion when markets underperform and replenish it when markets outperform.

Create flexibility

Retirees often assume that they can withdraw a certain percentage of their total portfolio, increasing this amount each year to account for inflation. Under this formula, a portfolio of $ 1 million and a withdrawal rate of 4% would provide pre-tax income of $ 40,000 in the first year and – assuming inflation is 2% per year – $ 40,800 per year. second year, $ 41,616 in third year and up from there. This strategy generally works well as long as no significant unexpected events occur. In fact, historically speaking, this strategy has allowed people to enjoy a stable income while continuing to grow their total assets.

However, since you set the rate at the start of retirement, it ignores some of the “what ifs” that might arise. If your wants and needs deviate from your planned spending, or the market becomes unpredictable, your measured withdrawal plan may not follow. In fact, your retirement portfolio can go down just as the absolute amount you withdraw goes up.

We can avoid this by building in some flexibility. Retirees typically spend more in the first few years and decrease as they reach their goals (like traveling with family, a vacation cabin). Once you’ve identified your spending goals, review your retirement plan every three to five years to make sure it can keep pace. If not, it may be better to set a relatively conservative withdrawal amount and adjust it for the market. If your portfolio experiences a market surge early on, adjustments can be made upward to allow for higher withdrawals.

Another option is to define a fixed percentage based on the year-end value of your portfolio. It could mean, however, that you’ll have years of hunting and leaner years, depending on the market. Alternatively, you can set a “floor” – an amount that can be withdrawn in any market environment to cover your basic needs – and adjust discretionary spending based on the performance of your plan.

Finally, think about the performance of your sources of income in “normal” markets, recessions or periods of high inflation. For example, social security, which typically includes an increase in the cost of living each year, is expected to remain stable in a variety of economic environments. Her resilience is a great reason for you and your spouse to maximize that income stream if you can.

Adjust as needed

The idea is to put your eggs in several baskets, since it is impossible to know what the markets will do this year or the next, let alone 20 to 30 years of retirement. Even with a carefully planned exit strategy, you can’t explain everything. The key is not to overreact when something unexpected happens. Even small changes can have a big effect when made worse over the long term. When things change, take the time to review your exit strategy with a professional without emotion and confidence.


There can be no assurance that an investment strategy will be successful. There are risks involved in investing, including the possible loss of capital. Annuity guarantees are based on the insurer’s capacity to settle claims. The market value of fixed income securities can be affected by several risks, including interest rate risk, default or credit risk and liquidity risk. Asset allocation does not guarantee profit or protect against loss. Withdrawals may result in a reduction in the capital of your account. Sources: comments and analyzes by Raymond James

Securities offered by Raymond James Financial Services, Inc., member FINRA / SIPC. © 2021 Raymond James Financial Services, Inc., member FINRA / SIPC. Investment advisory services offered by Raymond James Financial Services Advisors, Inc. King Financial Partners is not a registered broker / dealer and is independent of Raymond James Financial Services.

Tom the king CFP®, CLU®, AEP® is the principal registrant of King Financial Partners (222 Blue Course Dr., State College, PA). King Financial is a team of accredited professionals specializing in retirement, investment management, wealth transfer and estate planning. Tom can be reached at [email protected] (814) 234-3300.

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