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Understanding Sequence of Returns Risk

How Sequence of Returns Risk Can Impact Your Retirement

If you’re preparing for retirement and, like many Americans, you are worried about the current economic climate, you may be wondering what you can do to better protect yourself, your portfolio, and your family from financial risk. One of the most important factors to consider when searching for ways to mitigate risk surrounding retirement is “sequence of returns risk,” or sequence risk.

What Is Sequence of Returns Risk?

Sequence of returns risk refers to the risk associated with how you time your asset returns—a process known as return sequencing. In short, return sequencing impacts when you’ll realize returns from the assets in your retirement portfolio—and thus how long your retirement funds will carry you comfortably into post-working life.

The risks involved in return sequencing come from unexpected factors like market declines, unplanned withdrawals, or other variables that may affect your portfolio over its lifetime. For example, a market decline early in your retirement may have a significant impact on the longevity of your portfolio.

Because of the volatility that can come from this type of risk, your retirement advisor may calculate an average compound annual growth rate for your portfolio over the expected length of your retirement, taking into account the fluctuation of annual returns and other variables, such as contributions and withdrawals. This is to help you create a strategy that may mitigate these risks.

Understanding sequence of returns risk is also important when it comes to calculating your safe withdrawal rate (SWR), the estimated amount that can be withdrawn each year during your retirement without impacting portfolio health or depleting funds more quickly than you had planned. In other words, your SWR is the optimal amount you can withdraw without outliving your money. SWR usually takes into account variables such as your starting balance, expected number of years in retirement, and the different assets in your portfolio.

A popular SWR goal, known as the “Bengen rule” because it was first suggested by financial advisor William Bengen in 1994, is 4% per year, though he later revised it to 4.5%. Bengen studied historical market behavior to come to his conclusion of the 4% (or 4.5%) rule. During his studies, Bengen found that, depending on the timing of withdrawals from a retirement fund, the same portfolio could differ in longevity by up to 30 years.

Why Is Your Sequence of Returns Important?

Another reason to learn more about your unique sequence of returns is the “Retirement Risk Zone”—a 20-year period of time that encompasses the last 10 years of your working life and the first 10 years of your retirement. During this period, retirement funds are often at their healthiest, but also their most vulnerable. If you find yourself in the Retirement Risk Zone or getting close to this period, you may wish to consider expanding your diversification efforts to help protect yourself from sequencing risk. See how a precious metals IRA may help you further diversify your portfolio by reading our Special Report: “Protection in the Risk Zone.”

Understanding Your Post-Retirement Risk

Understanding your unique level of risk is an important step in finding the right risk mitigation strategy for your portfolio. You may wish to speak with a financial advisor about what your level of risk is and which strategies may be best for you. One common strategy for reducing risk in retirement is diversification. For example, some advisors recommend that between 5 and 25% of your portfolio be allocated to tangible assets like gold. If you’re unsure of how much you should be diversifying with gold or other tangible assets, take our diversification quiz.

How Can You Mitigate Sequence of Returns Risk?

As mentioned earlier, there are multiple ways you can help protect your portfolio against sequence of returns risk.

Diversification is key.

By diversifying and creating a portfolio that holds a range of varying assets, including tangible assets, you may reduce your overall risk exposure and become better protected against retirement risk and/or sequencing risk. How you choose to diversify may depend on your unique financial situation and goals.

Gold IRAs may help mitigate your retirement risk.

As part of a well-diversified retirement portfolio, a gold IRA may be a good option. Self-directed IRAs, including gold IRAs, provide you with full control over your IRA asset mix. Opening a gold IRA is simple with the help of a dedicated U.S. Money Reserve IRA Account Executive. If you are interested in learning more about taking charge of your financial future, you can request your free Gold IRA Information Kit today.

Despite economic uncertainty around the globe, you can take steps today to feel more secure in the decisions you make for tomorrow. Learning about your options is the best place to start.

To learn more about the “Retirement Risk Zone” and the benefits of precious metals IRAs, CLICK HERE to request a FREE copy of our Special Report “Protection in the Risk Zone.”

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