As you approach retirement, it's crucial to manage this significant risk.

• To minimize "sequence of returns" risk, individuals approaching retirement should ensure their investment portfolio is constructed appropriately.
• If you retire during a down market, you won't have to sell your investments for cash-flow needs.
• The future direction of stocks is uncertain, but it is predicted that price fluctuations will persist.

If your retirement is approaching and you're concerned about the stock market's volatility, it might be necessary to reassess your investment portfolio.

As a new retiree, one of the significant risks you may encounter is a prolonged market downturn that could affect your ability to withdraw funds from your savings. To minimize the long-term harm this could cause to your portfolio, it is advisable to allocate your money in a way that minimizes this risk before entering retirement.

Carolyn McClanahan, a certified financial planner and founder of Life Planning Partners in Jacksonville, Florida, stated that she has observed retirees being invested too aggressively early in retirement.

The Russia-Ukraine conflict has caused the major indexes to continue their zigzagging through the pullback, with the Dow Jones Industrial Average down 8.8% year to date, the S&P 500 off roughly 7%, and the Nasdaq Composite index sliding 13%.

Although the S&P has increased by more than 12% in the past 12 months, the Dow has only risen by approximately 7.5%, and the Nasdaq's one-year return is around 1.2%. Despite this, it is difficult to predict the future direction of the market, and volatility is anticipated to persist.

Those with long-term saving goals, such as retirement, are less affected by the stock market's fluctuations since their portfolios have ample time to recover before being utilized for cash flow.

For those beginning retirement, the transition can be particularly challenging.

The order of your losses or gains over time can have a long-lasting negative impact on your portfolio due to the "sequence of returns" risk.

The chart shows how market losses early in retirement can have a significant impact on a portfolio's long-term performance, even if both portfolios hold the same investments and experience the same annual returns over 25 years.

Portfolio A and Portfolio B both start with $100,000 and withdraw $5,000 annually, but Portfolio A experiences negative returns initially while Portfolio B has those losses at the end of 25 years. Despite the initial difference, Portfolio A is depleted by year 20 while Portfolio B ends up with more than double the assets it started with.

Vance Barse, wealth strategist and founder of Your Dedicated Fiduciary, emphasized the importance of understanding the risk to retirees' and pre-retirees' nest eggs.

It's advisable to review your portfolio's construction before your retirement date to mitigate sequencing risk. This typically involves keeping funds needed for expenses away from stocks and other riskier investments.

It is advised by some financial experts to maintain a cash reserve of one to two years to prevent selling during market downturns.

David Peterson, head of wealth planning at Fidelity Investments, advised having enough cash to avoid selling investments in a down market.

To accurately determine how much cash you will require, it is essential to understand your other sources of income, such as Social Security, pension, and annuities, as well as your actual expenditures.

“Many people inadvertently minimize their expenses,” Barse said.

It's important to diversify your investments beyond just cash.

Her retired clients maintain five years' worth of conservative investments to meet cash-flow needs, according to McClanahan.

McClanahan stated that by taking that approach, they wouldn't have to wait for a poor market to determine the solution.

For new retirees with limited savings, a conservative portfolio consisting of 50% stocks and 50% bonds may be suitable.

"We have clients who are only 30% or 40% invested in stocks, and it's about managing the financial and psychological risk," McClanahan stated.