Bob and Alice are fictional retirees who will help us explore how market conditions can impact even the best planned retirements. Both retired after working hard and following careful saving strategies for their later years.
Both of them are values driven and both of them are investing in the same things. They even enter retirement with the same amount of money.
However, Bob is facing the results of a risk most retirees don’t see coming.
Stock market volatility plays out for him differently than it does for Alice, and he finds himself in a situation no retiree wants to be in.
In today’s blog, we’re exploring this very important question:
How does stock market volatility impact investment accounts during retirement years, when retirees rely on withdrawals from their investments to cover living expenses?
Retirement Planning Involves Unique Risks
Systematic withdrawals from an investment account introduce a unique risk to retirees—one that doesn’t affect those still accumulating assets. This risk is known as sequence of returns risk, and it’s a crucial consideration in retirement planning.
What Is Sequence of Returns Risk?
Sequence of returns risk refers to the danger that the timing and order of investment returns will negatively impact a portfolio’s sustainability during the withdrawal phase.
Even if the average return over time is reasonable, taking withdrawals during periods of poor market performance—especially early in retirement—can significantly reduce the portfolio’s longevity.
Let’s check in on Bob and Alice, from the intro, and learn more about them.
Bob vs. Alice: Stock Market Volatility Experience
Our case study explores two retirees, Bob and Alice. Both start retirement with $1,000,000 and withdraw $50,000 per year (5%). That amount increases annually by 3% to account for inflation.
Bob experiences actual S&P 500 returns from 2000 through 2024.
Alice experiences the same returns, but in reverse order.
The charts below illustrate each of their experiences:
As shown, Alice’s finances remain strong: she receives $1,771,323 in total income and still has $1,579,939 left after 24 years. Bob, however, runs out of money in year 13.
This stark contrast clearly illustrates the impact of sequence of returns risk.
You can do everything “right” and still face difficult market conditions after retirement. That leaves you exposed to this risk, and without regular investment analysis and careful strategic planning, it is much easier to end up in the same position Bob is in.
Key Points to Remember:
- Timing Matters: Poor returns early in retirement, when withdrawals are actively being made, can have a much greater negative impact than poor returns later in retirement.
- Dollar Cost Ravaging: Selling investments at a loss to meet income needs locks in those losses, reducing the portfolio’s ability to recover.
- Irreversibility: Unlike in the accumulation phase, retirees can’t simply add more money to catch up—once it’s withdrawn, it’s gone.
Managing Risk Well Takes Strategy
Retirees face a unique vulnerability to market volatility, known as sequence of returns risk, which we illustrated above.
Even portfolios with solid long-term average performance can falter if significant losses occur early in retirement while withdrawals are being made. To help manage this risk, it’s important to implement strategies that provide predictable income—particularly in the critical early years of retirement.
At Master’s, we use a thoughtful investment bucketing approach to help our clients navigate this challenge and preserve long-term financial security.
In our next blog post, we’ll dive deeper into how this strategy works, and discuss creating those predictable streams of income. If you or someone you know is approaching retirement, we’d be happy to discuss how we can help build a retirement income plan tailored to your goals. Contact us with any questions today.
