Retired Investors Face Sequence Risk

Author(s): 
Adriana Reyneri
A bear market can threaten the security of retired investors who plan to fund their golden years with regular distributions from a 401(k) plan or other retirement nest egg. Certain investment strategies can help mitigate the sequence risk associated with such a “distribution portfolio.”
A sudden drop in market values, such as the crash of 2008, heightens the risk that investors with distribution portfolios will run out of money in retirement, according to certified financial planners Larry R. Frank St., and David M. Blanchett.
Take the example a retiree with a $1 million portfolio planning to withdraw $40,000 or 4 percent a year, say Frank and Blanchett, in an issue brief for the Journal of Financial Planning. Were the portfolio to drop in value by 25 percent, a retiree who continued withdrawing $40,000 a year would be taking out money at the rate of 5.33 percent a year. The higher the withdrawal rate increases the risk of depleting retirement assets.
Running out of money in retirement is by far the greatest financial fear of investors of all ages and wealth levels, according to a Millionaire Corner survey conducted in May.
Certain investment strategies can help mitigate sequence risk. Retired investors can reallocate assets to minimize exposure to volatility in declining markets, according to Frank and Blanchett. Retirees can also reduce their withdrawal rates to reduce exposure to declining markets.
“One of the biggest risks to your retirement is facing a bear market during the early years after you stop working,” Katherine Reynolds Lewis writes for Bankrate.com. “If you must sell stocks in a falling market, you risk depleting your nest egg at exactly the moment you need it -- leaving you with too little savings to cover your needs for your retirement.”
Retired investors facing such a scenario can help reduce sequence risk by drawing on the fixed-income portion of their portfolio, Lewis says. Some retired investors seeking guaranteed income turn to annuity products, but experts say that annuities are not suitable for all investors. 
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Source: http://www.millionairecorner.com/article/retired-investors-face-sequence-risk

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