It’s a retiree’s nightmare: running out of money late in life. But another scenario is arguably just as traumatic. Imagine a prolonged market downturn that depletes your savings in the years right around when you retire, forcing you to sell stock at a loss to meet living expenses. Even if the market bounces back, great returns on a shrunken pile of investments can’t make you whole. Retirement dreams are kneecapped from the get-go.
That possibility is called “sequence of return risk,” and it can hit in a danger zone stretching from the five years before retirement to the five years after. Without a strategy for dealing with this risk, a stock-heavy saver is vulnerable to a lower standard of living.