You've Saved for Retirement: Now You Need a Safe Income Plan

A mountain climber descends a snowy peak while using a rope.

(Image credit: Getty Images)

published 27 January 2025

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.

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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.

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Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Cliff Ambrose, the visionary behind Apex Wealth, serves as a wealth manager with an innate passion for steering individuals toward enriched financial independence. His journey began with a robust educational foundation in finance and economics, culminating in a degree that set the stage for his financial guidance career. With his start at Metlife, Cliff acquired valuable hands-on experience in the industry, complemented by securing his Series 6 and Series 63 licenses and, later, his Series 65 qualification.