The order of your investment returns can make or break a retirement. Here is how sequence risk works and how to defend against it.
What is sequence of returns risk?
Sequence of returns risk is the danger that the order in which you earn investment returns, not just the average, determines whether your savings last. While you are saving, order does not matter much. But once you start withdrawing, early losses are devastating because you are selling investments at low prices and have less money left to recover when markets rebound. Two retirees can earn the same 7% average return over 30 years; the one who suffers big losses in years one through five may run out of money, while the one whose losses come later finishes with plenty. It is one of retirement's most underappreciated risks.
How to protect against sequence risk
Several strategies reduce sequence-of-returns risk. Hold one to three years of spending in cash or short-term bonds so you can avoid selling stocks during a downturn, this is the core of the bucket strategy. Stay flexible by cutting discretionary spending in down years. Use a guardrails approach that adjusts withdrawals up or down based on portfolio performance. Maximize guaranteed income by delaying Social Security, which raises your benefit roughly 8% per year of delay after full retirement age. Together, these reduce how much you must sell at the worst possible time.
Don't let medical bills compound the risk
A large, unexpected medical bill during a market downturn forces you to sell investments at the worst time, amplifying sequence risk. Original Medicare leaves gaps with no out-of-pocket cap, making big bills possible. A Medigap plan turns unpredictable medical costs into a steady premium, removing one major source of forced selling. Call 1-800-MEDIGAP at 1-800-633-4427 to learn how predictable coverage protects your portfolio.