WHEN I RETIRED, friends would ask me how I was going to celebrate my retirement. A buddy suggested I take a cruise around the world. Another friend said, “Why don’t you explore Europe?” I did neither. I wound up exploring San Diego, which is about 120 miles from my home. That’s pretty much how my early retirement went. There were no expensive vacations or large purchases.
I didn’t feel comfortable spending a lot of money when I first retired. I was concerned about the stock market tanking and putting my investment portfolio at risk. According to a Prudential study, the worst time to lose money is the five years before retirement and the five years after.
During this 10-year window, you don’t want to spend assets that have performed poorly or suffer big self-inflicted investment wounds, because your portfolio may never recover. Retirees who are largely or entirely dependent on their investments for income are especially at risk.
The reason: When retirees withdraw money from their portfolio, those withdrawals—coupled with negative investment returns—can be especially damaging early in retirement. At that point, your nest egg is typically at its largest, so bad investment returns mean big dollar losses, plus you still have many years of retirement to pay for. This is often referred to as sequence-of-return risk.
Since we can’t control how the stock market performs, here are five ways to protect yourself, especially early in retirement: