You’ve saved up—do you have an income plan?
By JCA on May 21, 2025
by Cliff Ambrose for the Beacon
Retirement planning is often compared to climbing a mountain. The ascent — the accumulation phase — is about building your wealth, while the descent — the distribution phase — is about strategically living off those savings.
The sequence of returns risk
One of the most significant challenges during the descent is managing sequence of returns risk, which refers to the impact of the order in which investment returns occur during retirement. While the average rate of return dominates discussions during accumulation — because consistent contributions smooth out fluctuations — the sequence of returns becomes crucial during distribution.
Negative returns early in retirement, when withdrawals are being made, can significantly erode a portfolio’s value. This occurs because withdrawals lock in losses, leaving less capital to recover when markets rebound. Managing this risk is critical to ensuring your savings last throughout retirement.
Consider two retirees, each starting retirement at age 66 with $684,848 and withdrawing 5% annually while both achieving an 8% average return over time.
Retiree A begins retirement in a bear market. Early losses in the portfolio, combined with regular withdrawals, deplete his savings to nothing by age 82.
Retiree B starts retirement in a bull market. Early gains provide a strong foundation, allowing her portfolio to grow even after accounting for withdrawals. By age 90, she has $2.5 million in her portfolio.
Why the dramatic difference? While the average rate of return is the same for both retirees, the sequence of returns risk comes into play. For Retiree A, withdrawing during periods of negative returns compounds losses, leaving less capital to benefit from market recoveries. In contrast, Retiree B’s early gains create a cushion, protecting her portfolio from being quickly eroded by withdrawals.
This contrast demonstrates the critical role timing plays in the distribution phase and why managing early losses is essential.
A key aspect of retirement distribution is withstanding market volatility while meeting your income needs. To help weather unstable markets:
- Balance growth and safety. Combine growth-oriented investments with stable asset.
- Visualize your income plan. Use historical market data to simulate potential outcomes, providing confidence in your ability to sustain your lifestyle.