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. Each stage requires a different approach, but the descent is where specialized guidance becomes critical. Successfully navigating this transition can make the difference between a retirement filled with confidence and one fraught with financial uncertainty.
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.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
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 stark contrast demonstrates the critical role timing plays in the distribution phase and why managing early losses is essential to ensuring a long-lasting retirement portfolio.
Steps to mitigate sequence risk:
- Diversify with safe assets. Allocate part of your portfolio to safe, stable assets such as annuities, bonds or CDs. These can provide a safety net during market downturns.
- Design a flexible withdrawal plan. Work with your adviser to create a strategy that prioritizes pulling from safe assets during bear markets, reducing the need to sell equities at a loss.
- Engage experts early. Assemble a team that includes financial professionals, tax advisers and estate planners to ensure your retirement withdrawal strategy aligns with your broader financial goals.
Your transition from accumulation to distribution
Reaching the retirement summit is a major milestone, but transitioning from accumulation to distribution requires critical decisions and adjustments. Start by evaluating whether your current financial adviser is equipped to guide you through this phase. Ask yourself:
- Have they created a comprehensive income distribution plan with tax, estate and health care strategies?
- Have they reviewed how your savings will be taxed, including Roth conversions and required minimum distributions (RMDs)?
- Have they helped plan for long-term care and legacy goals?
If these areas haven’t been addressed, you may need a financial professional specializing in retirement distribution planning.
Build a resilient portfolio
A key aspect of retirement distribution is ensuring your portfolio can withstand market volatility while meeting your income needs. To help weather unstable markets:
- Balance growth and safety. Combine growth-oriented investments with stable assets to maintain financial stability during market corrections.
- Visualize your income plan. Use historical market data to simulate potential outcomes, providing confidence in your ability to sustain your lifestyle.
Plan for tax efficiency
Understanding the taxation of different income sources is critical in retirement. “Buckets” of money — taxable, tax-deferred and tax-free — must be strategically managed to reduce tax burdens and maximize income. Strategies like Roth conversions can be particularly effective in lowering future RMDs and reducing taxes on Social Security benefits.
Involve both spouses in planning
One common pitfall is when only one spouse is fully informed about the retirement plan. Both partners should understand the strategy, ensuring continuity if circumstances change. Establishing a relationship with a trusted adviser can help the surviving spouse navigate financial decisions confidently.
Avoid common retirement myths
- The 80% income rule. Many assume retirees need only 80% of their pre-retirement income, but most aim to maintain their full lifestyle. Plan for a realistic spending level to avoid shortfalls.
- The 4% rule. While once considered a safe withdrawal rate, the 4% rule doesn’t account for market volatility or today’s low-interest-rate environment. A tailored strategy based on your unique circumstances is more reliable.
Prepare for the unexpected
Market volatility can derail even the best-laid plans. Retirees who reallocate assets to safe investments before market corrections typically avoid significant losses. Working with an adviser who can proactively adjust your portfolio ensures you remain on track despite economic shifts.
Mastering the retirement mountain requires both preparation and adaptability. Whether it’s mitigating sequence risk, transitioning to distribution or building a resilient portfolio, the key is engaging with knowledgeable professionals who understand the complexities of this phase.
Retirement isn’t just about reaching the summit; it’s about descending safely, confidently and with the financial security to enjoy the journey ahead.
Want more guidance on retirement savings? Sign up for Kiplinger's six-week series, Invest for Retirement.
Related Content
- 10 Ways Retirees Can Manage Income Distribution
- Four Threats to the Distribution Phase of Retirement
- A 10-Year Retirement Planning Checklist
- Retirement Calculator: How Much Do I Need to Retire?
- How Your Home Can Fill Gaps in Your Retirement Plan
-
I Retired at 65 With $7.8 Million and Feel Like I Over-Saved. My 40-Something Son Is on the Same Path. Should I Tell Him to Reconsider?We ask financial experts for advice.
-
Deciding on Senior Living? 10 Things You Should KnowSenior living options are no longer God's waiting room.
-
I'm a Financial Pro: This Is How You Can Guide Your Heirs Through the Great Wealth TransferFocus on creating a clear estate plan, communicating your wishes early to avoid family conflict, leaving an ethical will with your values and wisdom and preparing them practically and emotionally.
-
To Reap the Full Benefits of Tax-Loss Harvesting, Consider This Investment Strategist's StepsTax-loss harvesting can offer more advantages for investors than tax relief. Over the long term, it can potentially help you maintain a robust portfolio and build wealth.
-
Try This One-Minute Test to Uncover Hidden Health RisksFinding out this little-known fact about your body could reveal your risk of heart disease and more. It's a simple, free check for healthy aging.
-
Child-Free Cruises Perfect For Your Retirement CelebrationHow to find a bespoke ocean or river vacation for adults. Many of these options are smaller, charming river cruises, expeditions, or niche experiences.
-
Social Security Wisdom From a Financial Adviser Receiving Benefits HimselfYou don't know what you don't know, and with Social Security, that can be a costly problem for retirees — one that can last a lifetime.
-
Take It From a Tax Expert: The True Measure of Your Retirement Readiness Isn't the Size of Your Nest EggA sizable nest egg is a good start, but your plan should include two to five years of basic expenses in conservative, liquid accounts as a buffer against market volatility, inflation and taxes.
