Navigating Volatility in Retirement: A Timely Reminder
The recent sharp decline in the stock market—followed by a swift recovery—has reverberated throughout the financial world. For retirees and those nearing retirement, this moment should not be dismissed as a passing blip. It is a critical wake-up call to reassess financial strategies, especially in light of sequence of returns risk. This often-overlooked risk can rapidly drain a retirement portfolio when market losses coincide with early withdrawals.
Below, we’ll break down what sequence risk is, why recovery rallies can be misleading, and what actions retirees should take now. We’ll also examine a case study from 2000 to 2013 that illustrates how early market declines can dramatically affect long-term retirement income.
The Danger of Sequence of Returns Risk
Sequence of returns risk refers to how the order of investment gains and losses affects a portfolio—especially when withdrawals are occurring. For retirees, experiencing market losses early in retirement can be devastating. Unlike those still saving, retirees don’t have the luxury of waiting for a market rebound without consequences.
A historical example: from 2000 to 2002, the S&P 500 lost nearly 49% of its value during the dot-com crash. A retiree withdrawing funds each year during this decline would have locked in losses, reducing the portfolio’s recovery potential even once markets rebounded.
While the market eventually recovered, the portfolio’s principal may never catch up—threatening the sustainability of income over time.
Don’t Be Fooled by Recovery Rallies
Bear markets often include sharp—but temporary—rallies. These “sucker’s rallies” can create a false sense of recovery and delay necessary portfolio adjustments.
Historical Examples:
-
2000–2002 Dot-Com Crash: The S&P 500 saw several short-term gains during its 49% overall drop. A 15% rally in early 2001 was followed by further declines.
-
2007–2009 Financial Crisis: Despite a 57% drop, the market had intermittent double-digit gains—like the 11.6% surge on October 13, 2008—that failed to signal real recovery.
-
1973–1974 Bear Market: The index fell 48% with several rallies that prolonged the recovery period to over seven years.
These brief upticks often persuade retirees to delay adjusting their investment strategies, leaving them vulnerable to further losses and increasing sequence risk.
Case Study: Retirement Portfolio Withdrawals During Bear Markets
Let’s look at a retiree who began withdrawing from a $1,000,000 S&P 500 portfolio in January 2000, taking $45,000 annually, adjusted for 2% inflation.
| Year | Portfolio Start | Withdrawal | Return | Portfolio End |
|---|---|---|---|---|
| 2000 | $1,000,000 | $45,000 | -9.10% | $854,100 |
| 2001 | $854,100 | $45,900 | -11.89% | $706,781 |
| 2002 | $706,781 | $46,818 | -22.10% | $503,796 |
| … | … | … | … | … |
| 2013 | $326,120 | $58,212 | 32.39% | $373,270 |
By 2013—when the S&P 500 had fully recovered—the portfolio was still down to $373,270, less than 40% of its original value. Despite the market’s recovery, the combination of early losses and regular withdrawals severely depleted the account.
This demonstrates how sequence risk can undermine retirement income sustainability, even when markets eventually rebound.
What Retirees Should Do Now
1. Reassess Risk Tolerance
Don’t overestimate your ability to weather market storms. A 10%+ drop, like we saw in April 2025, might seem temporary—but deeper downturns may follow.
Ask yourself:
-
How would you respond to a 30% loss?
-
Can your portfolio support withdrawals during a multi-year downturn?
Work with a financial advisor to run stress tests using “worst-case scenario” simulations.
2. Shift to Income-Focused Strategies
Retirees should diversify into more stable, income-generating assets:
-
Dividend-Paying Stocks: Provide regular income with less reliance on market growth.
-
Bonds & Bond Funds: Help stabilize returns during equity declines.
-
Annuities: Offer guaranteed income, though with trade-offs such as reduced liquidity.
-
Cash Reserves or Short-Term Treasuries: Cover 2–3 years of living expenses without needing to sell during downturns.
This approach creates a buffer, allowing the rest of the portfolio time to recover.
3. Adopt Dynamic Withdrawal Plans
Instead of a fixed dollar amount, consider:
-
Flexible withdrawals: Reduce spending during downturns.
-
Percentage-based withdrawals: Adjust annually (e.g., 4% of current balance).
These approaches extend portfolio longevity and provide greater adaptability.
4. Diversify Across Asset Classes
Relying solely on equities increases vulnerability. Include:
-
REITs for income and inflation protection
-
International stocks for geographic diversification
-
Alternative investments for low correlation to markets
Also consider dollar-cost averaging for new contributions to smooth volatility over time.
Conclusion: Use This Rebound to Strengthen Your Retirement Strategy
The April 2025 market drop and bounce-back should not be dismissed. Like the rallies during past bear markets, it could precede more volatility. If you’re already retired—or planning to soon—this is your moment to act.
Key takeaways:
-
Early market losses can have long-lasting effects on retirees.
-
Static strategies leave portfolios exposed to sequence risk.
-
Adjusting risk exposure, incorporating income-generating assets, and adopting flexible withdrawal plans can protect your future.
Don’t wait for the next downturn to test your plan. Use this moment to reassess, rebalance, and realign your retirement strategy for lasting income and peace of mind.