How to Reduce Sequence of Return Risk | 2 Essential Strategies for Early Retirement

As retirement nears, protecting your savings from market volatility is crucial. John, 52, plans to retire at 55 and is concerned about sequence of return risk, a key factor in retirement planning. While his savings are strong, an early market downturn could impact his portfolio.

Sequence of return risk occurs when market declines coincide with early withdrawals, reducing the longevity of your portfolio. Even with average long-term returns, early losses paired with withdrawals can be damaging.

To mitigate this, we advised John to diversify his equity-heavy portfolio by adding bonds and other assets to balance risk. A sustainable withdrawal strategy is also key; we suggested keeping five years' worth of living expenses in safer assets to avoid selling equities during a downturn.

Additionally, Roth conversions could reduce future tax burdens.

Beyond finances, John’s plan includes staying active, volunteering, and addressing healthcare needs before Medicare kicks in.

Planning ahead helps mitigate risks like sequence of return, allowing for a more secure and fulfilling retirement.

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⏱Timestamps:⏱
0:00 - John’s concerns and plans
3:57 - Sequence of returns risk
5:58 - Looking at numbers
8:28 - Healthcare and other expenses
11:03 - Income in retirement
12:32 - Cash flows
15:29 - Withdrawal rate risk
19:06 - Concentration risk
20:41 - Example 1
24:43 - Example 2
28:22 - No perfect science
29:22 - 5 years of expenses set aside
32:34 - Considering location
36:41 - Prioritize diversification over growth
39:31 - Wrap-up

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