Overlooked risk can significantly impact your portfolio as you approach retirement, according to an advisor.

• The "sequence of returns" risk could pose a threat to your portfolio as you near retirement.
• Withdrawals during early retirement can lead to a decrease in your nest egg due to poor investment returns.
• To minimize risk, consider portfolio diversification, fixed-income allocations, and flexible withdrawals.

As their retirement approaches, investors must be mindful of the "sequence of returns risk," which could endanger their retirement savings.

Experts suggest that retirees can minimize the negative impact of a commonly overlooked and misunderstood risk.

Withdrawals and poor investment returns can lead to a decrease in your retirement savings, resulting in a shrinking nest egg.

The investment returns and withdrawal timing during the early retirement years can significantly impact the next 30 years, advised Collin Lyon, a certified financial planner and wealth strategy advisor at Anderson Financial Strategies in Dayton, Ohio.

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How sequence risk hurts your portfolio

At age 59½, investors can usually withdraw funds from their retirement accounts without incurring penalties.

Younger retirees or near-retirees who experience stock market downturns just before or as they start tapping accounts face a significant risk.

Selling more assets for the same amount of cash when the stock market drops could mean withdrawing from your portfolio, leaving you with fewer investments to capture future growth when the market rebounds.

Younger retirees face a significant challenge in covering their living expenses for decades with their nest egg, according to experts.

Financial advisors suggest several ways to reduce your sequence of returns risk.

Diversify your portfolio

Experts advise adjusting portfolio allocations from high-risk assets to bonds as retirement nears, considering factors such as risk tolerance, goals, and life expectancy.

Lyon stated that diversifying across multiple asset classes can reduce the impact of volatility.

Build a 'war chest' to fund living expenses

To avoid selling assets in a down market, it is recommended to maintain a six-month emergency fund and a "war chest" to cover living expenses, according to CFP Jonathan Bednar II of Paradigm Wealth Partners in Knoxville, Tennessee.

Bednar's clients have a five-year supply of fixed-income assets, such as bonds or certificates of deposit, to help them cope with market volatility during their retirement years, when risk is at its highest, according to Bednar.

Opt for a flexible withdrawal rate

Experts suggest that flexible withdrawals can help protect your portfolio from sequence risk.

Instead of a fixed percentage withdrawal rate, the rate can be adjusted based on market performance, as explained by CFP Brad Brescia of Orlando-based Moisand Fitzgerald Tamayo.

Reducing withdrawals during years of negative returns can help preserve the portfolio's core, but some retirement accounts eventually require withdrawals.