One of the biggest hurdles I face as a planner is convincing clients whose numbers support retiring that they can take the leap. That’s because one of the biggest fears new retirees have is their investments suddenly dropping just as they stop earning a paycheck. It’s a scary thought.
Imagine you’re climbing down a mountain after a long hike. Going up took hard work, but getting down safely is just as important. Retirement works a lot like that—you’ve spent years building your savings, and now it’s time to make that money last as you “climb down.”
One of the biggest challenges retirees face is something called Sequence of Return Risk. That’s a long phrase, but it simply means the order in which your investment gains and losses happen can make a big difference in how long your money lasts once you start taking regular withdrawals.
When you’re still working and saving, a market downturn might hurt temporarily (or even help, because you are buying more shares at low prices), but you have time to recover. But once you retire, that changes. You start withdrawing funds to cover living expenses—and if the market drops early in retirement, you could be selling investments at low prices. That can permanently reduce how much your nest egg can grow later, even if the market bounces back.
Let’s look at an example:
Jethro and Zebediah each retire with $500,000 and plan to withdraw the same amount each year. They both get the same average annual return over 20 years, but Jethro experiences bad market years at the beginning, while Zebediah has them near the end. The one who faced bad years early could run out of money much sooner—even though the average return was identical. That’s Sequence of Return Risk in action.
Enough with the problems, Kristi. What can I do about it?
- I like my clients to keep at 3 years of planned withdrawals (not spending – some spending will be covered by Social Security or pensions) in a combination of money markets and a bond ladder.
- Be flexible—spend a little less during market downturns.
- Maintain a balanced mix of investments .
- Consider delaying large withdrawals or taking Social Security earlier than expected if the market is struggling.
If you wait for the Perfect Stock Market Conditions, you will NEVER retire. The market will always rise and fall, but thoughtful timing and flexibility can help you make your savings last as long as you do—so you can enjoy retirement without worry.
