Despite the slight recovery in the economy, the current decline in U.S. equities has sent investor fears about future declines into overdrive. The S&P 500 has tumbled some 14% from its February high, sparking concerns among retirees about the long-term impact on their retirement plans.

A Opportunity for Some, a Threat to Others

Financial advisors describe the current decline as an opportunity for many investors who have decades of time left in the market. However, for retirees who are hoping to generate income from their investments, a short-term decline in their portfolios can spell long-term trouble for their retirement plans.

• Retirees who are approaching or have recently entered retirement face a critical period known as the “retirement red zone,” during which the five years before and after retirement are absolutely crucial for their financial well-being.
• The current decline in equities can exacerbate concerns among retirees about the sustainability of their retirement plans.
• Advisors warn that a sharp drop in invested assets early in retirement can have a snowball effect on a retiree’s financial position later in life, leading to a shorter expected lifespan of their savings.

The Impact of Sequence-of-Returns Risk

Simulations from the Schwab Center for Financial Research illustrate the impact of investment declines in early retirement. Two investors enter retirement with $1 million in investments and withdraw $50,000 each year, increasing their withdrawals by 2% to account for inflation.

Investor No. 2 ends up with over $1.3 million in assets, while Investor No. 1 runs out of money in just over 17 years. The simulation highlights the importance of a proactive withdrawal strategy to protect against the sequence-of-returns risk.

Protecting Against Sequence-of-Returns Risk

Advisors emphasize the need for retirees to have a proactive withdrawal strategy in place to protect themselves from the sequence-of-returns risk. This can include having a “cash bucket” in place, a reverse mortgage line of credit, a HELOC, or diversification within their portfolios.

• Retirees should consider having a combination of these strategies to protect their retirement plans.
• Advisors recommend that retirees have between 18 to 24 months in cash to weather the ups and downs of the market and insulate themselves from market corrections.

Preparing for Downturns

Preparing effectively for such downturns starts years in advance, advisors say. By having a balanced portfolio that is not experiencing the volatility of the total stock market, retirees can better navigate short-term declines without damaging long-term investments.

According to data, many retirees fall short of this mark. In 2024, 41% of retirees said they did not have three months of emergency savings, up from 31% in 2022, according to a survey from Employee Benefit Research Institute.

Strategies for Retirees

For Americans in the retirement red zone who lack robust cash reserves, advisors say there are still a couple of strategies that can help preserve long-term retirement goals.

• Lowering withdrawals and delaying retirement can help preserve long-term retirement goals.
• Retirees can also consider reducing their immediate reliance on investments by delaying retirement.

Reducing Distributions

For early retirees who are heavily reliant on their investment portfolios for income, it’s critical to reduce distributions during a down market, according to Keith Fenstad, vice president and director of wealth planning at Tanglewood Total Wealth Management.

“What happens on the front end of your retirement changes exponentially the long term,” he said. “So if [a client] really needs to [retire], then I’m saying, ‘Let’s focus on being the most conservative with our spending now, with the opportunity of trending up, just given the current uncertainty.”

Retirees can also consider delaying retirement to reduce their immediate reliance on investments.

Conclusion

Retirees face a challenging time ahead, with the current decline in U.S. equities sparking concerns about the long-term impact on their retirement plans. While some investors may view the current decline as an opportunity, others may see it as a threat to their financial well-being.

Advisors emphasize the need for retirees to have a proactive withdrawal strategy in place to protect themselves from the sequence-of-returns risk.