Don't Let the Market Ruin Your Retirement

When portfolio losses hit at the same time as withdrawals, it’s a double whammy. Here’s how to mitigate the risk.

- Adam Shell

AFTER SQUIRRELING AWAY money in a 401(k) or IRA for decades, the last thing you need is a stock market downturn at the start of your golden years. Market sell-offs are always painful, but they pose a greater risk when they occur early in retirement, when you’re no longer earning a paycheck and are withdrawing money from your nest eggs.

A steep decline in the value of your shares just as you’re selling into a falling market is akin to a roadblock set up on the on-ramp to a comfortable retirement. The ill-timed one-two punch of lousy performance and cash outflows can put a dent in your retirement savings, and it can be hard for your portfolio to recover. “Those early years are really important. It’s just the way the math works,” says Rob Williams, managing director of financial planning and retirement income for the Schwab Center for Financial Research.

Wall Street refers to this investment peril as sequence-of-returns risk. The risk is that annual portfolio losses are frontloaded near the start of retirement, when you begin to withdraw funds, severely weakening your portfolio’s growth potential and its ability to provide steady income over decades despite an eventual market recovery. The sequence of returns “can make a difference between having enough money to last throughout your life span or running out of money or cutting back on the lifestyle you planned for,” says Amy Arnott, a portfolio strategist at Morningstar. Taking the same withdrawals early in retirement during an up market allows you to maintain your account value over the long term while paying yourself along the way.