A retirement account can look healthy on paper and still become vulnerable at the wrong time. The concern is not only how much you have saved, but what happens if the market falls just as you begin taking regular withdrawals. Learning how to avoid retirement sequence risk can help you make decisions that protect both your income and your peace of mind.
Sequence risk, also called sequence-of-returns risk, is a real concern for retirees who depend on investments for income. It refers to the order in which investment gains and losses occur. A market decline early in retirement can do more damage than the same decline later, especially when you need to sell investments to cover everyday expenses.
What Retirement Sequence Risk Looks Like
Imagine two retirees who each begin with the same savings balance and withdraw the same amount each year. Both experience the same average market return over 20 years. One experiences stronger returns in the early years and market losses later. The other faces steep losses immediately after retiring.
The second retiree may have to sell investments when prices are down to produce needed income. That leaves fewer dollars invested for a future recovery. Even if markets improve later, the account may not recover as effectively because part of the balance has already been spent.
This is why an investment strategy that worked well while you were earning a paycheck may need adjustment once retirement begins. During your working years, market downturns can be unsettling, but you may have time to wait and continue contributing. In retirement, regular withdrawals can turn a temporary loss into a long-term income concern.
1. Build a Retirement Income Plan Before You Need It
A clear income plan starts with a simple question: Which expenses must be paid every month, no matter what the market does? Housing, food, utilities, insurance premiums, prescription costs, transportation, and debt payments should be part of the conversation.
Reliable sources of income, such as Social Security, pensions, or other guaranteed income sources, may cover some of these needs. If there is a gap, the goal is to understand how that gap will be covered before a market downturn forces difficult decisions.
A retirement plan should not be based only on an account balance or a hoped-for rate of return. It should identify where income will come from, when it will begin, and how long it may need to last. For married couples, it should also consider what changes if one spouse dies or requires long-term care.
2. Keep Near-Term Spending Out of Market Volatility
One practical way to avoid retirement sequence risk is to avoid relying on stock market investments for money you expect to spend soon. Some retirees choose to maintain a reserve of cash or other lower-volatility assets for near-term expenses.
The appropriate amount depends on your circumstances. A household with substantial pension income may need a different reserve than a household relying heavily on investment withdrawals. The key is creating room to avoid selling growth-oriented investments at a loss during a poor market period.
Cash reserves involve trade-offs. Money held in cash may not grow enough to keep pace with inflation over long periods. Still, a reasonable reserve can provide flexibility and reduce pressure during volatile markets. It is not about putting every dollar on the sidelines. It is about matching each portion of your savings to the job it needs to do.
3. Separate Essential Income From Growth Money
Not all retirement dollars need the same level of access, growth potential, or protection. It can help to think of savings in separate roles rather than one large pool.
Money needed for essential living expenses may call for greater stability and predictability. Funds intended for future goals, discretionary spending, travel, or legacy planning may be able to take on more market exposure. This approach can make it easier to stay disciplined when markets become uncertain.
For some retirees, insurance-based products such as certain annuities may be part of an income strategy. Depending on the product and contract terms, an annuity may offer features designed to provide predictable income or protect principal from market losses. These products are not right for every situation. They can involve fees, surrender periods, limits on access to funds, and different levels of liquidity. A licensed professional can explain how a specific product works and whether it fits your needs.
4. Be Careful With Withdrawal Rates
A withdrawal amount that feels manageable in a strong market may become harder to sustain after a downturn. Taking a fixed percentage or dollar amount from investments without reviewing the plan can increase the risk of depleting assets too soon.
Your spending needs matter, but flexibility can be valuable. During a difficult market period, some retirees can postpone a major purchase, reduce travel spending, or delay replacing a vehicle. Others may have limited room to adjust because most of their budget goes to necessities. That is why a plan should be personal rather than based on a one-size-fits-all rule.
Review withdrawals at least annually and after major life changes. Rising medical costs, a spouse’s death, home repairs, tax changes, or helping an adult child can all affect the plan. A regular review gives you the opportunity to make measured adjustments instead of reacting in a crisis.
5. Plan for Inflation and Health Care Costs
Avoiding market risk alone is not enough. Retirement income also needs to withstand the rising cost of living. Expenses that seem modest today may become more demanding over a 20- or 30-year retirement.
Health care deserves special attention. Medicare can be an essential foundation, but it does not cover every cost. Premiums, deductibles, copays, dental care, vision care, hearing needs, prescription drugs, and potential long-term care needs can place pressure on a household budget.
Planning for these expenses can reduce the chance that you will need to draw unexpectedly from investments during a market decline. It may also help protect a surviving spouse from carrying financial burdens alone. A thoughtful plan considers both everyday costs and the events families hope will never happen.
6. Avoid Making Emotional Decisions During a Downturn
Fear can lead people to sell after the market has already fallen. Overconfidence can lead people to take more risk after a long period of strong returns. Neither reaction is a reliable retirement strategy.
A written plan gives you something to return to when headlines are alarming. It can outline what money is available for current expenses, what assets are intended for the longer term, and when it makes sense to rebalance or make changes. The goal is not to predict every market movement. It is to avoid letting short-term market conditions control your long-term decisions.
If you are already retired, a downturn is also a good time to revisit your income sources and spending plan. The best response may be no action at all, or it may be a small adjustment. It depends on your available reserves, your required withdrawals, your health, and the income you can count on.
7. Discuss the Plan With Your Spouse and Family
Retirement planning is easier when the people affected understand the plan. A spouse or trusted family member should know where important documents are kept, what income sources exist, and who to contact if questions arise.
This discussion is not only about investments. It can include life insurance, final expense planning, beneficiary designations, monthly bills, and the plan for handling a loss of income. Clear communication can prevent confusion at a difficult time and help loved ones make informed decisions.
Skirvin & Associates believes practical planning starts with a conversation. A licensed representative can help you review retirement income concerns, understand available insurance and annuity options, and ask questions without pressure or complicated jargon.
Retirement should not require guessing whether the next market drop will change your life. With a clear income plan, appropriate reserves, and decisions matched to your needs, you can move forward with greater confidence and focus more attention on the people and moments that matter most.