You’ve worked for decades to build your retirement savings. You’ve set a date, made your plans, and now you’re ready. But what happens if the market takes a sharp downward turn right as you’re stepping away from your career?
For many of the families we work with here in the Roanoke Valley, this concern is very real and deserves serious attention before you make the leap.
What Is Sequence of Returns Risk?
When you’re still in your working years, a market downturn is frustrating, but time is on your side. Your portfolio can recover before you need to start drawing from it. As you approach retirement, you lose that advantage.
The moment you retire and flip the switch from saving to spending, the order in which you experience market gains and losses becomes critically important. This is known as sequence of returns risk, and it can quietly derail even the most carefully built retirement plan.
Your first five years of retirement are considered the danger zone. If you are drawing from accounts while values are falling, there is less money left in the portfolio to benefit from an eventual market rebound. Those early losses can become permanent, compressing how long your savings last and threatening the retirement income strategy you worked so hard to build.
Why Early Retirement Losses Are Especially Dangerous
Consider two retirees with identical portfolios. One retires into a bull market; the other faces an immediate downturn. Even if both portfolios eventually average the same return over time, the retiree who experienced early losses will have less money in the long run. The culprit is the combination of falling values and ongoing withdrawals happening at the same time.
It is not just the size of the market drop that matters. A 20 percent decline in year one of retirement does far more lasting damage than the same decline in year fifteen, simply because of how withdrawals interact with reduced portfolio values during the recovery period.
Retirement Strategies to Guard Against Sequence of Returns Risk
The good news is that you do not have to leave your retirement security up to market timing. A proactive retirement income strategy can include several protective approaches:
- A cash reserve of one to two years of living expenses, so you can avoid selling investments during a downturn
- A bucket approach that segments your portfolio by time horizon, covering short-term cash, mid-term bonds, and long-term growth assets
- Flexible withdrawal strategies that allow you to pull back spending modestly in difficult years and preserve your portfolio’s longevity
- Strategic asset allocation that shifts toward more stable investments as you approach and enter retirement
- A stress-tested retirement plan that models real-world scenarios like bear market conditions in your early retirement years
How Vested Partners Can Help
At Vested Partners, David Ellis, CFP®, works with families across the Salem area and throughout the Roanoke Valley to build retirement income strategies that account for market volatility. By stress-testing your plan against scenarios like a down market in your first years of retirement, David can help ensure your savings are built to last regardless of what the market does on the day you retire.
If you are within five years of retirement, now is the time to review your plan through the lens of sequence of returns risk. Visit our website or call our office at (540)389-6060 to schedule a conversation with David.
