The alarm goes off, and instead of getting ready for work, you check your retirement accounts—only to see losses. Your stomach sinks. In retirement, market drops aren’t just numbers—they’re potential grocery money.
Volatility feels different now. In your working years, time helped you ride out downturns. But retirement is about withdrawing, not contributing. That shift makes every market swing more personal—and risk management more critical.
Understanding the Retirement Risk Landscape
The Sequence of Returns Challenge
The biggest threat to retirement portfolios isn’t just market volatility—it’s the timing of that volatility. Negative returns are more harmful early in retirement than later, according to recent research from Fidelity Investments. This phenomenon, called sequence of returns risk, happens when you experience poor market performance during the first five to ten years of retirement.
Here’s why timing matters so much: when you withdraw money from a falling portfolio, you’re forced to sell more shares to generate the same amount of cash. This leaves fewer shares to benefit from future market recoveries. Think of it like this—if you need $4,000 per month and your investments drop 20%, you’ll have to sell more shares than if the market was stable. Those extra shares you sold can’t participate in the recovery.
The First Five Years Are Critical
Financial experts call the first five years of retirement the “danger zone” for portfolio withdrawals. During this period, your retirement success can be determined not just by your savings amount, but by market timing that’s completely beyond your control. This is particularly concerning given that some 4.18 million Americans in 2025 are expected to reach age 65, more than any previous year.
The mathematics of sequence risk can be startling. Two retirees with identical portfolios and identical average returns over 20 years can end up with vastly different outcomes simply based on when good and bad returns occurred during their retirement.
Building Your Volatility Defense Strategy
One of the most effective ways to protect against early market volatility is maintaining a cash buffer. Many financial experts recommend keeping one to two years’ worth of living expenses in cash or cash equivalents. This gives you the flexibility to avoid selling investments during market downturns.
Think of cash as insurance for your portfolio. Yes, it might earn lower returns than stocks over the long term, but it serves a crucial purpose: preventing you from having to sell stocks at the worst possible times. When markets are down, you can live off your cash reserves while waiting for recovery.
Flexible Withdrawal Strategies
Instead of sticking to a rigid withdrawal schedule, consider building flexibility into your retirement spending plan. Current research suggests that new retirees can safely withdraw 3.7% of their portfolio annually, but this assumes fixed withdrawals regardless of market conditions.
Flexible strategies might include skipping inflation adjustments after poor market years, reducing discretionary spending during downturns, or temporarily increasing withdrawals during strong market periods. This flexibility can help extend the life of your portfolio while maintaining reasonable living standards.
Asset Allocation During Volatile Times
Diversification Beyond Stocks and Bonds
Traditional asset allocation focused on stocks and bonds, but today’s retirees need to think more broadly about diversification. This might include buffered ETFs or alternative investments that don’t move in lockstep with the stock market.
Diversification isn’t about eliminating risk—it’s about managing it. While some investments in your portfolio might be struggling, others might be performing well, helping to smooth out overall returns.
Rebalancing During Chaos
Market volatility creates rebalancing opportunities, but it also requires discipline. When stocks crash, your allocation will shift toward bonds and cash, which means rebalancing requires buying more stocks when they’re cheap. This feels counterintuitive but is often the right long-term move.
Regular rebalancing also forces you to sell high and buy low, which can help boost long-term returns. However, during retirement, you might want to be more conservative about rebalancing frequency to avoid unnecessary transaction costs and taxes.
Tax-Smart Strategies During Volatility
Asset Location Matters
Where you hold different types of investments can make a big difference during volatile periods. Keeping tax-inefficient investments in tax-advantaged accounts and holding tax-efficient investments in taxable accounts can help you manage both taxes and volatility.
During market downturns, you might have opportunities for tax-loss harvesting in taxable accounts, selling investments at a loss to offset gains elsewhere. This strategy can help reduce your overall tax bill while repositioning your portfolio.
Roth Conversions During Downturns
Market volatility can create opportunities for Roth IRA conversions. When your traditional IRA values are depressed, you can convert shares to a Roth account at lower tax cost. If the investments recover in the Roth account, all future growth will be tax-free.
This strategy requires careful planning and consideration of your current and future tax situation, but it can be a way to turn market volatility into a long-term tax advantage.
Emotional Management During Market Storms
Avoiding Panic Decisions
The biggest investment mistakes often happen during the most volatile market periods. Fear drives people to sell at exactly the wrong time, locking in losses just before markets recover. Having a written investment policy statement can help you stay disciplined during emotional times.
Consider limiting how often you check your account balances during volatile periods. Daily market watching can increase stress without providing any useful information for long-term retirement planning.
The Importance of Perspective
Market volatility feels scarier in retirement, but it’s important to remember that markets have always been volatile and have always recovered from downturns. The S&P 500 has experienced numerous bear markets throughout history, but long-term investors have been rewarded for staying the course. And, not all of your investments may be in or follow a S&P 500 investment.
All-in-all this doesn’t mean ignoring risk or being reckless with your retirement savings. It means having a plan that accounts for volatility and sticking to that plan when emotions are running high.
Work With Us
Market volatility during retirement is inevitable, but it doesn’t have to derail your financial well-being. The key is having a comprehensive strategy that accounts for sequence of returns risk, maintains appropriate liquidity, and provides flexibility to adapt to changing market conditions. Remember that successful retirement investing isn’t about avoiding volatility entirely, it’s about managing it intelligently while still achieving the growth you need to fund decades of retirement.
At Purposeful Wealth Advisors, we specialize in helping retirees develop strategies for managing market volatility while preserving their long-term financial health. Our approach combines careful asset allocation, tax-efficient withdrawal strategies, and behavioral coaching to help you stay on track during challenging market periods. Contact us today to discuss how we can help you build a retirement plan that’s designed to weather market storms while keeping you comfortable and confident throughout your retirement years.
