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Manage the ‘sequence of returns’ risk
Typically, you should avoid selling assets when the stock market is down, especially during earlier retirement years. Those early withdrawals paired with market dips can stunt your long-term portfolio, known as the “sequence of returns risk.”
Negative returns are more harmful early in retirement than later because you could miss more years of compound growth, according to a 2024 report from Fidelity Investments.
That’s why flexibility is important when it’s time to pull funds from your retirement savings, Caswell said.
Caswell recommends a bond ladder of Treasuries that mature every six months or one year for up to five years. You can also use the ladder method with certificates of deposit.
As assets mature, you can use the proceeds to cover living expenses. Alternatively, you could reinvest part of the cash if you receive more than you need, he said.
The strategy provides “more transparency and control” of when you’re taking money out of that part of your portfolio, Caswell said.
Create a ‘TIPS ladder’
You could also weigh a ladder of so-called Treasury inflation-protected securities, or TIPS, according to Amy Arnott, a portfolio strategist with Morningstar Research Services.
Issued and backed by the U.S. government, TIPS can provide a hedge against inflation because the principal rises or falls based on the consumer price index.
“Inflation and loss of purchasing power can be a risk with bonds, which is why a TIPS ladder can be attractive,” especially when you’re able to get a positive return, she said.