One concern ranks high among people approaching retirement: “What happens if the market declines just before I retire, or in the first years after I stop working?”
The period from 2000 through 2010 had a significant impact on the people who entered retirement at the time. Internet-stock gains led some investors to take on more risk than their long-term plans could support. When markets fell and the 2007–2009 financial crisis followed, some households found their portfolios carried more risk than their income plans could withstand, and they had to delay retirement. It is exactly this kind of pressure that a well-built glide path and stress-tested withdrawal plan are designed to withstand.
Why the Order of Returns Can Change the Plan
Sequence-of-returns risk describes how the timing of market returns affects a retirement-income plan. Two households may earn similar average returns over a 20-year period, yet experience very different outcomes if one encounters several weak market years immediately after retirement while the other encounters them later.
Withdrawals create the difference. When a household sells investments during a downturn to meet spending needs, fewer shares remain invested for a potential recovery, so the portfolio must earn returns on a smaller base while still supporting future withdrawals.
The grocery bill still arrives every week, and the property tax bill still arrives once a year, regardless of what the account statement shows that month. A retiree drawing income does not get to pause spending until the market recovers, and a large annual bill landing during a downturn can force a withdrawal at the worst possible moment. The order of returns shapes spending flexibility, the pace of withdrawals, and how long a portfolio needs to support the household.
We Transform the Portfolio’s Purpose Before Retirement Arrives
Early in a career, a higher allocation to growth assets often fits the plan, since there is time to recover from volatility and the primary objective is building assets for the future.
As retirement approaches, we transform that portfolio for a different purpose. About five to seven years out, we begin building a glide path with each household: a gradual reduction in risk as the family moves from accumulating wealth toward drawing income from it. Our advisory team, where every advisor holds the CFP® certification or is an active candidate in the CFP® certification program, is trained specifically to manage that transition, since drawing income from a portfolio requires a different discipline than growing one.
By retirement, we aim to hold a mix of assets that can support spending, preserve flexibility, and continue participating in long-term growth. That mix gives a household several places to look for income and liquidity, so pressure on any single part of the market does not become pressure on the whole plan.
Diversification Needs More Than Two Sources of Return
Stocks and bonds have traditionally formed the core of a diversified portfolio, and for many years the two moved inversely: when stocks fell, bonds often rose, and the combination smoothed out the ride. That relationship has weakened. Increasingly, stocks and bonds rise together and fall together, eroding the diversification households have long counted on from a traditional mix.
In 2022, the S&P 500 declined about 18%, while the Bloomberg U.S. Aggregate Bond Index fell about 13%. A household holding only those two asset classes had nowhere else to turn that year.
This is why we build alternative investments into our clients’ portfolios: private real estate, private credit, private-market investments, and hedge-fund strategies, among other approaches. These strategies respond to different forces than stocks and bonds do, and often on a different timeline, so a downturn that hits equities and fixed income together does not have to hit the entire portfolio at once.
We Test the Plan for What the Future Might Bring
Stress testing is central to how we evaluate a retirement-income plan throughout the planning process. We build scenarios and run them through our models: What if the market declines 10%? What if it declines 20%? What would that mean for the portfolio, planned withdrawals, taxes, and the years that follow?
We also review risk from two directions with every household. Financial capacity to take risk is a function of the numbers: the withdrawal plan, the time horizon, the assets available. Emotional capacity to take risk reflects how a household actually experiences a decline, independent of what the plan can technically absorb. A household may have the financial capacity to withstand a 20% drop and still lose sleep over it. We build the plan around both, and we provide a household a specific illustration of what a downturn would mean for their spending and account values, using their own numbers rather than an abstract percentage.
That analysis extends to assets a household may not fully control, such as a 401(k) with a limited investment menu or a family trust with a trust company who directs the investments. These holdings still affect a household’s overall risk and liquidity, so we factor them into the stress test and the broader plan even when we cannot manage that piece directly.
The result is a plan built with a clear view of where pressure may emerge, so the household and our advisory team already have a shared vision for the response when a decline occurs, or alternatively, when a bull market arrives.
Preparation Creates More Choices
Retirement planning cannot remove market uncertainty. It can prepare the portfolio and income plan for conditions that may be less favorable than expected in the early years.
A thoughtful glide path, several sources of return, and a stress-tested withdrawal plan give a household more flexibility when markets decline: the flexibility to draw from other assets, adjust discretionary spending when appropriate, or let long-term investments recover rather than selling them under pressure.
Richard P. Slaughter Associates has been fee-only and fiduciary since 1991. We bring portfolio design, income planning, tax coordination, and stress testing into one coordinated wealth plan built to support the life you want to live in retirement.
Learn more about retirement and income planning.
If any of this resonates — whether you are within several years of retirement, reviewing how much market risk your portfolio carries, or wondering how an early decline could affect your income plan — we would welcome a conversation.
CFP Board owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, and CFP® (with plaque design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
