- For new retirees, 2022 could be a difficult year with falling stocks and bonds.
- Recent retirees face the risk of poor returns in the current market scenario.
- To mitigate the “sequence-of-returns” risk, many suggest the 4% rule.
It could be a bad time for new retirees as the economy slows down and the market tumult is at its worst. Plummeting stocks and bonds coupled with four-decade-high inflation has made it worse for people who have retired in 2022.
The “sequence-of-returns” has come to haunt those who have recently retired.
What is the sequence of returns risk?
Sequence-of-returns risk, or sequence risk, is the risk that the market (like the current state of the market) declines in one’s early years of retirement. When added with the ongoing withdrawals, it significantly reduces the longevity of a portfolio. Thus, it is called “sequence risk” or “sequence-of-returns” risk.
The current economic situation is one such scary time for new retirees. It is not favorable for seniors who are dependent on their investments for their retirement income.
But are there ways to deal with such a market situation? How the newly retired and the aged can protect their investments?
© Nruboc | Megapixl.com
Early market volatility adversely affects retirees
People exposed to market tremors in the early months and years of retirement have higher risks. An individual who withdraws money early in retirement from a portfolio that is shrinking in value is at a higher risk of reducing the value of their nest egg compared to a retiree who stumbles a market fall many years later.
In a situation like the present one, when the US market indices have plunged very low and inflation is soaring, the new retirees must exercise extra caution to wade through the tough times.
They can cut corners and reduce spending, which will result in fewer withdrawals from their nest egg.
The new retirees this year can also restructure where their withdrawals come from. Rather than drawing money from stocks or bonds, which are in the red this year, they can instead pull from cash.
Drawing money from cash buckets while allowing other assets to grow is a great way to address the sequence-of-returns risk.
Selling stocks and bonds by a new retiree in this current market scenario is a situation to best avoid. It can never be a solution.
Those who can afford it should contemplate earning some side income after retirement so that there is less pressure on their nest egg.
To mitigate the sequence of returns risk, many suggest the 4% rule. The retirees withdraw 4% of their portfolio in one year of retirement and adjust the amount moving forward, matching it with the rate of inflation.