sequence risk mitigation

Example

“Sequence risk mitigation included keeping two years of cash and a bond tent at retirement.”

Memory Tip

MITIGATE — buffer against bad timing. Cash and bonds protect stocks from forced selling.

Why It Matters

Sequence risk mitigation is crucial because the order of investment returns during early retirement can significantly impact whether your portfolio lasts through your lifetime. Poor market performance in the first few years of retirement can deplete your savings faster than average returns would suggest, making this one of the most important planning considerations for retirees.

Common Misconception

Many people believe that as long as their portfolio averages a certain annual return over time, they will be fine in retirement. However, a 30 percent loss in year one followed by 30 percent gains in year two produces very different results than the reverse, especially when you are withdrawing money during that period.

In Practice

Consider two retirees with one million dollars who each withdraw 40,000 dollars annually. Retiree A experiences a 20 percent market decline in year one (leaving 760,000 dollars after withdrawal) while Retiree B experiences 20 percent growth (leaving 1,160,000 dollars after withdrawal). Even if both see identical returns afterward, Retiree B will have significantly more wealth because the early decline happened to a larger portfolio balance in Retiree A case.

Etymology

Modern retirement planning concept — protecting the portfolio during the most vulnerable years.

Common Misspellings

Related Terms

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