Most of us spend our working lives saving for retirement. But retirement isn’t just grandkids and golf clubs—it’s also the moment a financial plan is most at risk. And the next wave of retirees may be particularly vulnerable.
We are a decade into a robust bull market—notwithstanding this week’s 3% drop in the Dow Jones Industrial Average and 2.6% fall in the S&P 500. Now, bulls don’t die of old age, as they say, but they do slow down. And whether you’re in the camp that the market is headed for a fall, a slow decline, or will keep chugging along, there’s virtually no market strategist, economist, or investor who expects the next 10 years to look like the past 10. Investors—and new retirees in particular—need to prepare for much lower returns, and protect themselves from a downturn.
A market downturn early in retirement is much more damaging than one a decade or so in. It’s called sequence risk—it’s one thing to project an average annual return for your portfolio of, say, 6% over the next 20 years, but markets don’t move in averages. They can fall a few years in a row, then be up a few years, and so on. When the market falls early in retirement—just as retirees are withdrawing to fund their lifestyle—it can be a problem. The math is simple: If your portfolio drops 20%, you need a 25% gain just to get back to where you were. And if you’ve withdrawn money to live on, your balance is even lower and requires an even greater upswing to recover.