Market downturns are an inevitable part of investing. During your working years, downturns are actually opportunities — you're buying assets at lower prices. But in retirement, the calculus changes dramatically.
Sequence of Returns Risk
The order in which you experience investment returns matters enormously when you're withdrawing from a portfolio. A significant downturn early in retirement — even if followed by strong recovery — can permanently impair your portfolio's ability to sustain withdrawals.
Consider two retirees with identical average returns over 20 years, but in reverse order. The one who experienced losses early while making withdrawals may run out of money years before the one who experienced those same losses later.
Protection Strategies
The Bucket Strategy
Segment your assets into short-term (1-2 years of expenses in cash), medium-term (3-7 years in bonds), and long-term (7+ years in growth assets). This can reduce the need to sell growth assets during a downturn.
Guaranteed Income Sources
The more of your essential expenses covered by guaranteed income (Social Security, pensions, annuities), the less vulnerable you are to sequence risk.
The Color of Money Approach
At Prospera, we use the Color of Money framework to help clients visualize and position their assets appropriately. Green money (lower-risk, principal-protected options), yellow money (moderate risk), and red money (growth, with market risk) each play a specific role in protecting against and capitalizing on market cycles.
Guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. Annuities are not bank deposits, are not FDIC insured, and have surrender charges and limited liquidity in early years. Prospera Financial offers insurance products. This content is for educational purposes only and is not tax or legal advice.
Concerned about protecting your retirement from market volatility? Let's discuss strategies tailored to your situation.