Why early-retirement market losses can matter

Two retirees can experience the exact same average return over 20 years and end up with very different outcomes, depending on the order those returns occur, especially if one of them is withdrawing income along the way. A significant market decline in the first few years of retirement, combined with ongoing withdrawals, can reduce a portfolio's ability to recover, even if later years perform well.

While you are still working and contributing, a market downturn can actually help, since you are buying shares at lower prices. Once you begin withdrawing instead of contributing, the math changes: selling assets during a decline locks in losses on the portion you withdraw, leaving less principal to participate in a later recovery.

Consider two hypothetical retirees who both average the same return over time, but one experiences a downturn in years one and two of retirement while the other experiences the same downturn in years 19 and 20. The retiree who experiences the early downturn while withdrawing income may end up with a meaningfully different ending balance, purely because of when the decline occurred. This is an illustration of a general concept, not a projection of any specific outcome.

How any of these approaches fit a given situation can vary widely depending on goals, other assets, and risk tolerance, and none of them eliminates market risk entirely.

• Holding a cash or short-term bond reserve to draw from in down years instead of selling equities
• Adjusting withdrawal amounts in years following a significant decline
• Using a bucket or time-segmented approach to separate near-term and long-term money
• Considering guaranteed income sources to cover essential expenses

• How would my plan look if a significant decline happened in my first two years of retirement?
• Do I have a source of funds I could draw from instead of selling investments during a downturn?
• How often will my withdrawal strategy be reviewed and adjusted?