When you're working and saving for retirement, investing is all about growth. You contribute regularly, ride out market ups and downs, and focus on long-term gains. But once you retire and start drawing from your investments, everything changes.
The Shift: Accumulation vs. DistributionDuring your working years, you're in the accumulation phase—building wealth and taking advantage of market dips by buying low. But in retirement, you're in the distribution phase, where you need to withdraw money from your investments to cover living expenses. This shift makes a huge difference in how market losses impact you.
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The Danger of Large Losses in Retirement
When you’re no longer contributing and instead withdrawing from your portfolio, large market downturns can be devastating.
Here’s why:
Here’s why:
- Sequence of Returns Risk – If the market drops early in your retirement and you’re taking withdrawals, you are locking in losses. This means you have less money left to recover when the market eventually rebounds.
- Compounding in Reverse – When you were working, compound growth worked in your favor. In retirement, withdrawing from a shrinking portfolio compounds losses instead of gains.
- Longevity Risk – Retirement could last 20-30 years. A big loss early on increases the chances of running out of money later in life.
A Real-World Example
Imagine two retirees with identical $1 million portfolios. Both withdraw $40,000 per year. One starts retirement in a strong market, and their portfolio grows despite withdrawals. The other retires into a bear market, suffering a 30% loss early on. Even if the market eventually recovers, the second retiree’s withdrawals have locked in losses, and their portfolio may never fully rebound.
The Solution: A Smarter Retirement Investment Strategy
In retirement, protecting what you’ve built is just as important as growth. A well-structured retirement portfolio balances:
- Growth potential for long-term security
- Income generation to support your lifestyle
- Risk management to reduce exposure to severe downturns