Market cycles are a natural part of an investor's experience. While every investor experiences periods of market growth and decline, retirement introduces additional planning considerations that may make the timing of those market movements more meaningful. Unlike during your working years, when you're typically contributing to your investment accounts, retirement often marks the beginning of portfolio withdrawals.

As a result, market performance may affect your retirement income differently than it did while you were saving. Retirement planning involves many factors—including income needs, tax considerations, withdrawal strategies, investment risk, and sequence of returns risk. Understanding how these factors work together can help you make more informed decisions as you prepare for retirement.

Why Market Cycles Matter During Retirement

Market cycles matter, especially negative ones, because of the outsized impact investment losses early in retirement can have on your portfolio. If you withdraw money when your portfolio's value has dropped, you'll need to sell more investments to generate the income you need, depleting your savings more quickly and leaving you with fewer assets to benefit from future growth during a market recovery.

Retirement is much different than the years you have spent accumulating. As an accumulator, during market declines you are purchasing shares of stocks by contributing to your 401(k), Roth IRA, or other investment accounts. In retirement, however, you may be selling investments during those same market declines to meet your income needs if you do not have a well-thought-out withdrawal strategy.

This is what makes sequence of returns risk unique. It's not simply how much the market returns over time, but when those returns occur relative to your retirement withdrawals that may influence long-term retirement outcomes.

Retirement planning accounts for both long-term investment growth and the impact market conditions can have on a retiree's financial goals. Your retirement portfolio allocation should reflect both short-term income needs and long-term objectives. This is critical because a negative year in the market paired with a large withdrawal year from the portfolio could have a much greater impact on your long-term financial security.

A thoughtful retirement income planning strategy considers more than investment performance alone. It also helps determine how retirement withdrawals will be funded, which assets may be used first, and how your retirement portfolio can continue supporting both current income needs and long-term growth.

How Market Cycles Can Affect Retirement

Sequence of returns risk—sometimes simply referred to as sequence risk—continues to be an important topic in retirement research. For example, Morningstar has highlighted what it calls the "retirement risk zone"—the period spanning the years immediately before and after retirement, when market declines may have the greatest impact on a retiree's long-term financial security. During this stage, investors often begin taking retirement withdrawals while no longer making regular contributions, making early market losses more difficult to recover from.

While this concept may sound theoretical, its impact becomes much easier to understand when viewed through a simple example.

CNBC published an article that exemplified how sequence of returns risk can affect retirement accounts. It compared two retiree portfolios that experienced the same average return over 20 years—but in a different order—and had very different outcomes. The article compared two retirees in 2000 with $1 million invested in an account tracking the returns of the S&P 500, making withdrawals of $40,000 per year that increased 2% annually for inflation.

In 2000, a bear market began. The 37% pullback for the S&P 500 that occurred between 2000 and 2002 would have reduced the $1 million account to about $470,000 by January 1, 2020, the end of the 20-year period. The balance reflects the annual withdrawals of $40,000 and the 2009–2020 bull market.

Now, if the order of yearly returns were flipped, the portfolio would show much different performance. At the end of the 20-year period, the retiree would have had more than $2.3 million in that account after the exact same schedule of income distributions.

What Does Sequence of Returns Risk Mean for Your Retirement Portfolio?

As shown above, the difference in the two portfolio values over the 20-year period is nearly $2 million. There is a broader lesson here: 1) market cycles are normal, and they do not stop simply because you retire, and 2) a thoughtful retirement portfolio with an appropriate asset allocation can help limit the need to sell investments during periods of market decline.

There is much more to building a retirement portfolio than simply managing sequence of returns risk. As you transition into retirement, your investment strategy should also be designed to generate reliable income, support long-term growth, respond to changing market conditions, and adapt as your financial needs evolve. This is why retirement income planning considers not only investment performance, but also when and how withdrawals are made throughout retirement.

For many retirees, successful retirement investing is less about maximizing returns in any single year and more about creating a strategy that can provide sustainable income through a variety of market conditions.

In fact, the portfolio that helps you successfully retire may look very different from the one that best serves you ten years later. Retirement is not a one-time event—it is a journey that requires thoughtful adjustments along the way.

That's why regular reviews of both your investment portfolio and your overall financial plan are so important. Changes in spending, retirement income needs, taxes, or market conditions may affect how much risk is appropriate and how your portfolio should be positioned. Working closely with a trusted financial advisor can help you evaluate these changes and make thoughtful adjustments when needed.

Bringing It All Together

As retirement approaches, market headlines and predictions can make it tempting to focus on what the markets might do next. But successful retirement investing isn't about predicting short-term market movements. It's about building a plan that can adapt to different market environments.

Understanding concepts such as sequence of returns risk can help you make more informed decisions about your retirement portfolio, retirement withdrawals, and retirement income planning. A thoughtful strategy considers how these pieces work together to manage investment risk and support your needs throughout retirement.

Whether you're still preparing for retirement or have already begun taking retirement withdrawals, regularly reviewing your plan can help ensure your strategy continues to support your changing needs and long-term objectives.

If you're nearing retirement or would like to better understand how your investment strategy aligns with your long-term goals, the team at Prosperity Planning is here to help. We'd welcome the opportunity to discuss your goals, answer your questions, and help you build a retirement strategy designed to provide confidence for years to come.

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