When you transition from working life to retirement, everything changes, especially the way your investments and portfolio should be structured.
Most retirees focus on their savings, but fewer people think about how their retirement portfolio strategy needs to shift once they start making withdrawals. What worked during the accumulation years may not serve you well in retirement.
Here is why.
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Sequence of Returns Becomes Critical
Let’s say you have $100,000 invested and you’re still working. Over the next 10 years, you earn the following returns:
- Year one: down 18 percent
- Years two through nine: up 6 percent
- Year ten: up 26 percent
Your ending value after 10 years is around $164,000.
Now flip the returns. In year one you gain 26 percent, then earn 6 percent for several years, and in the final year, you lose 18 percent. The result is the same: your portfolio still ends up around $164,000.
If you’re not contributing or withdrawing, the order of the returns doesn’t matter. But once you retire and start withdrawing money, everything changes.
Withdrawals and Bad Timing Can Hurt
Now imagine that same $100,000 portfolio, but this time you are retired and withdrawing $10,000 at the end of each year, adjusted upward by 3 percent for inflation.
In the first scenario where the portfolio drops 18 percent in year one, you run out of money after 10 years. Your balance is negative $10,000.
In the second scenario where the portfolio gains 26 percent in year one, you end up with more than $46,000 after the same 10-year period.
Same portfolio. Same average return. Very different result.
This is called sequence of returns risk, and it is one of the biggest reasons your retirement portfolio strategy must be different from your accumulation strategy.
A Smarter Way: The Bucketing Strategy
To reduce the risk of selling investments during down markets, consider using a bucketing strategy. This involves dividing your retirement savings into separate buckets based on time horizon and risk level.
For example:
Bucket one holds one to two years of safe, liquid cash for spending needs
Bucket two holds medium-term investments for income or stability
Bucket three holds long-term growth investments for the later stages of retirement
By drawing from stable buckets when markets are down, you protect your long-term investments and reduce the chances of depleting your portfolio early.
Final Thoughts
If your retirement portfolio looks the same as it did while you were working, it may be time for a review. Retirement brings new risks and new rules. A thoughtful strategy can help you protect what you have and make it last.
For a personalized look at how to structure your retirement income plan, visit our website and book an appointment with us.
