Retirement Planning Education
What Happens to Your Retirement
When the Market Drops First?
The order of returns matters as much as the returns themselves. Understanding sequence of returns risk could be the most important financial education you receive before you retire.
For educational purposes only. The scenarios below are illustrative examples, not representations of specific individuals or guaranteed outcomes. Past market performance does not predict future results. This is not individualized financial, tax, legal, or investment advice.
Retirement planning conversations often center on one number: how much have you saved? That is an important question. But it is not the only one that determines whether retirement looks the way you imagined.
There is a risk that receives far less attention than it deserves — and it does not appear on a brokerage statement until it is too late to adjust. It is called sequence of returns risk. It means that when a market decline happens relative to when you retire may matter as much as how much you have saved.
The two scenarios below begin with the same retirement savings and end with very different lives.
Same Savings. Different Strategies. Completely Different Retirements.
These illustrative scenarios reflect the real difference between a market-exposed retirement account and a protected accumulation strategy when markets decline at the wrong time.
Market Exposed
The Retirement That Required Going Back to Work
Robert retired at 65 with $800,000 in a traditional 401(k). He had worked for 35 years and done everything he was told. He had contributed consistently and watched his account grow. He was proud of that number.
Eighteen months into retirement, the market experienced a significant correction. Robert’s account lost 38 percent of its value — consistent with declines seen in 2008 and similar market downturns. His $800,000 became $496,000 almost overnight.
Robert was already withdrawing from the account under the widely cited 4 percent rule, which suggested he could withdraw around $32,000 per year without depleting the account over time. But that rule was based on his original balance. On a balance of $496,000, a 4 percent withdrawal provided roughly $19,800 annually — not enough to cover his expenses. And because the market needed to recover significantly just to return to where it had started, every withdrawal he made during the downturn locked in losses.
After two years of difficult mathematics, Robert made the decision he had hoped he would never have to make. He went back to work part-time at 68 — not because he wanted to, but because his retirement account could no longer support the retirement he had planned.
Robert saved diligently for 35 years. The timing of one market decline, combined with the structure of his accounts, changed the retirement he had earned into one he had to manage around.
Protected Strategy
The Retirement That Looked Exactly Like the Plan
Patricia also retired at 65 with $800,000 accumulated. She had worked with a financial educator who introduced her, years earlier, to the concept of protecting a portion of her savings from market loss while still participating in potential market growth through an indexed strategy. Her retirement income came from a protected vehicle that offered a floor of zero — meaning in years the market declined, her account did not lose value.
When the same market correction arrived, Patricia opened her statement and saw the same news Robert saw. Markets were down sharply. She felt the anxiety that comes with watching those headlines. Then she looked at her own account balance.
It had not changed.
Her protected strategy meant that the market’s losses were not her losses. While the broader market spent the next several years recovering to its previous level, Patricia’s account continued growing from where it had been — unaffected by the decline and continuing to build on the progress she had made.
Patricia took her planned distributions. She traveled. She supported her grandchildren. She spent her retirement doing what she had spent decades working toward.
Patricia did not earn higher returns in every year. What she had was a strategy that did not lose money when the market did — and that one distinction made her retirement look exactly like the life she had imagined.
38%
Average peak-to-trough decline of the S&P 500 during the 2008 financial crisis
4 yrs
Approximate time for the market to recover its 2008 losses — years many retirees could not afford to wait
Rule of 4%
A withdrawal guideline built on assumptions that break down when a major decline occurs early in retirement
Key Concepts
What Every Pre-Retiree Needs to Understand
Sequence of Returns Risk
Two retirees with identical savings and identical average returns over 20 years can experience dramatically different outcomes depending on when the bad years occur. A significant loss in the first years of retirement — when withdrawals have already begun — creates a compounding problem that good years later cannot fully correct. The account never recovers to where it would have been.
The 4 Percent Rule Was Not Designed for Market Crashes
The 4 percent withdrawal guideline — the idea that a retiree can withdraw 4 percent of their portfolio annually without outliving their savings — was developed based on historical market data and assumes a diversified portfolio. It does not account for a significant decline occurring in the first years of retirement, nor does it account for the real cost of inflation, rising healthcare expenses, or a retirement that lasts longer than average.
For many retirees, the 4 percent rule becomes a floor that is difficult to live on — and a ceiling that protects the account at the expense of the life the retiree intended to live.
Protected Accumulation Strategies
Certain financial vehicles are designed to participate in market-linked growth while protecting the account from market losses. In years when the underlying index performs positively, the account may grow — subject to caps or participation rates defined by the policy. In years when the market declines, the account is credited at zero rather than registering a loss.
This protection comes with tradeoffs. These accounts typically do not capture the full upside of a strong market year, and they have their own terms, conditions, and costs that should be understood before any decision is made. But for many pre-retirees, the peace of mind that comes from knowing a market decline will not derail the retirement they have spent decades building is worth the conversation.
The Retirement Income Plan vs. the Retirement Savings Account
Saving for retirement and planning retirement income are two different disciplines. A savings account tells you how much you have accumulated. A retirement income plan tells you how those resources will support your spending, your taxes, your health costs, and your legacy — for as long as you need them to. Building a strategy that connects those two things is the real work of retirement planning.
Is Your Retirement Built to
Survive the Wrong Market Year?
A Safety Net Review is an educational conversation that examines your current retirement readiness — including how your savings might be affected by a significant market decline at the wrong time.
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