Retirement changes your relationship with money.
For decades, you've been a builder. You built a career, a family, a home, and a financial foundation. Along the way, you diligently saved and invested, watching your retirement accounts grow year after year.
Then one day, you stop working and begin living off the portfolio you've spent a lifetime building.
That's when investing can start to feel different.
Many retirees describe it as feeling like they're pulling blocks from a Jenga tower. Every withdrawal can feel a little uncomfortable. Every market decline can feel a little more personal.
And while market volatility gets most of the attention, the biggest threat to a successful retirement may not be the market decline itself. It's when that decline happens.
Market Downturns Are Normal
One of the most important truths retirees need to understand is this: The stock market will decline at some point during your retirement.
Not might. Will.
If you spend 20 or 30 years in retirement, there will almost certainly be periods when your portfolio is down 20% or more from a previous high. That's not a prediction. It's simply the nature of investing.
The mistake many people make is viewing every market decline as a sign that something has gone wrong. In reality, market downturns are normal, expected, and already built into the long-term investment experience.
The question isn't whether the market will go down. The question is whether your retirement plan is prepared when it does.
Understanding Sequence of Returns Risk
When you're in your working years, market declines are often easier to navigate. You're still earning a paycheck, continuing to contribute to retirement accounts, and, most importantly, you have time.
Retirement is different. Once you're taking regular withdrawals, poor market performance early in retirement can have an outsized impact on your long-term success.
This is known as sequence of returns risk: the danger of experiencing poor investment returns during the first several years of retirement while simultaneously withdrawing money from your portfolio.
The challenge isn't necessarily lower average returns. It's the timing.
The Same Returns, Very Different Outcomes
Imagine two retirees. Both begin retirement with a $1 million portfolio. Both withdraw $50,000 per year, adjusted upward for inflation. Both experience the exact same market returns over the next 20 years.
The only difference is the order in which those returns occur.
In the first scenario, the retiree experiences several strong years early on, allowing the portfolio to grow before eventually encountering a major market decline later in retirement. Despite periods of volatility, the portfolio remains healthy and continues growing.
In the second scenario, those exact same returns happen in reverse order. The retiree experiences substantial losses in the early years while taking withdrawals. Even though the average return over the entire period is identical, the portfolio never fully recovers.
Same portfolio. Same withdrawals. Same average return. Completely different outcome.
That's the power of sequence of returns risk.
Why Early Losses Matter So Much
When market declines occur early in retirement, retirees may be forced to sell investments at depressed prices to fund living expenses. Those sales permanently reduce the number of shares available to participate in the eventual recovery.
A portfolio can recover from a market decline. A portfolio has a much harder time recovering when it is shrinking because of both market losses and ongoing withdrawals.
That's what makes the early years of retirement so important.
A Practical Way to Manage the Risk
While sequence of returns risk can't be eliminated entirely, it can be managed.
One strategy is to estimate the portfolio withdrawals you'll need over the next five years and hold an appropriate amount in conservative investments. These might include cash, Treasury bills, high-quality bonds, or other short-term fixed-income investments.
Why five years? Historically, many bear markets have recovered within two to three years, while some more severe downturns have taken closer to five years. Planning for five years can create a larger buffer against a prolonged decline.
How the Strategy Works
Suppose a retired couple has a $1.5 million portfolio and needs approximately $200,000 of annual cash flow for expenses and taxes. They receive $50,000 per year from a pension, another $50,000 from Social Security, and some additional income from part-time work or a small business.
After accounting for those income sources, they calculate the amount that must come from their investment portfolio each year. When they total the expected portfolio withdrawals over five years, the amount is roughly $523,000, or about 35% of the portfolio.
Based on that analysis, an allocation of roughly 65% stocks and 35% bonds and cash may provide enough liquidity for planned distributions while giving the stock portion time to recover from a significant decline.
Rather than worrying about daily market headlines, the retirees can have confidence knowing that several years of anticipated withdrawals are supported by reliable income and conservative investments.
Retirement Planning Is About More Than Returns
Many people focus exclusively on maximizing investment performance. But successful retirement planning isn't just about earning the highest return possible. It's about creating a portfolio that can support your lifestyle through both good markets and bad ones.
A strong retirement plan recognizes that volatility is inevitable and prepares for it ahead of time. Because the real risk isn't simply that markets decline. The real risk is being forced to make difficult financial decisions at exactly the wrong time.
Final Thoughts
If you're approaching retirement, one valuable exercise is to identify where your cash flow will come from during the next five years.
By coordinating portfolio withdrawals with Social Security, pensions, and other reliable income, you can build a strategy designed to weather market downturns without disrupting your retirement goals.
Markets will rise and fall. That's normal. The key is making sure your portfolio is built to withstand the journey.