Is sequence risk keeping anyone else up at night?

[Kevin_debrown]

Three years out from my dad's target FIRE date and I'm fixating on sequence of returns risk for him. I'm into finances so I know a thing or two about this. A Morningstar study showing early losses can increase your odds of running out of money by 6x is genuinely concerning. His dividend portfolio yields around 3.8%, which isn't quite enough to cover expenses without touching principal. So now, we don't know whether to chase higher yields when we see stories like AT&T slashing dividends by 50% when their payout ratios got out of control.
How are you handling the first five years when sequence risk is supposedly at its peak? thinking about keeping 2 to 3 years of expenses in cash, but that feels like a lot of drag

 

[zen mother]

2-3 years cash isn't drag, it's insurance and that's exactly what the bucket strategy is for, you avoid selling equities in a downturn. Someone once told me about bond tent strategy, higher bond allocation going into retirement, then shift back to equities over 5 to 10 years.
Don't chase higher yields just to avoid touching principal, that's how you end up with AT&T situations

 

[AustinMichaels]

Three years out from my dad's target FIRE date and I'm fixating on sequence of returns risk for him. I'm into finances so I know a thing or two about this. A Morningstar study showing early losses can increase your odds of running out of money by 6x is genuinely concerning. His dividend portfolio yields around 3.8%, which isn't quite enough to cover expenses without touching principal. So now, we don't know whether to chase higher yields when we see stories like AT&T slashing dividends by 50% when their payout ratios got out of control.
How are you handling the first five years when sequence risk is supposedly at its peak? thinking about keeping 2 to 3 years of expenses in cash, but that feels like a lot of drag

The cash buffer idea isn’t bad, a couple of years’ expenses can buy peace of mind during a downturn. I've heard mention of ladder short term treasuries or CDs instead to reduce the drag and also about this bucket approach. It’s all about buying time for the portfolio to heal without selling low

 

[Stamford.man]

diversified dividend fund might be safer than picking individual high yielders, but you're still vulnerable to broad market corrections hitting both price and payouts.
Look into bond tent strategy? like @zen mother sited, basically overweight bonds leading into and right after retirement, then gradually shift back to stocks as sequence risk drops off to help some of the edge off those critical first years without parking everything in cash