No matter how long you plan and save for retirement, there will always be an element of risk in your finances. If you put too much of your retirement plan in equities, any unforeseen market volatility can be the difference between a happy retirement and needing to find part-time work.
This risk of not being able to sustain a fixed annual income from a volatile portfolio is also known as sequence risk or sequence of return.
There are several strategies that can help you reduce or even avoid these risks as you begin planning for your retirement. One of these strategies is to simply reduce your portfolio’s overall volatility.
Let’s say your current retirement plan is mostly made of bonds and investment assets. However, sudden issues in the economy deplete the worth of the assets that you planned to use as a supplement income after your limited savings begin to diminish. Reducing your portfolio's volatility, while not conducive to long-term returns, can benefit you during small market downturns.
Other ways that you can reduce your portfolio volatility include researching pension plans, adjusting asset allocation, creating a laddered bond portfolio, or developing a declining equity glide path.
A declining equity glide path is when you elect to begin your equity allocations at a lower rate than is normally recommended. As time goes on, your rate will increase and decrease the vulnerability of early retirement declines.
Want to learn more about how you can reduce your sequence risk? Check out our article on Forbes.