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Spending From Your Portfolio in Retirement Can be Dangerous Thumbnail

Spending From Your Portfolio in Retirement Can be Dangerous

Relying on the stock market to fund retirement can be risky. Retirees who depend on market returns to generate income face the potential loss of savings and spending ability should they experience poor market returns during the critical early years of retirement while spending from their portfolios. Retiring into a bear market or, worse, a recession at the start of retirement can deplete savings, leaving fewer assets to benefit from a market recovery and resulting in a smaller pool of funds to spend. Better known as the sequence of returns, the risk that arises from the order investment returns occur is more important than the actual returns, especially in early retirement. A retirement spending strategy that relies on the stock market may not be the best approach for funding a retirement lifestyle.  

That said, no one advocates bypassing investments as a retirement funding source. They’re an essential component for generating retirement income. But pulling money out during a market decline at the start of retirement is far from an ideal strategy. Preferably, you would want a buffer between the vagaries of the market and your spending. Common approaches include using assets such as annuities, home equity, and cash unrelated to market returns to fund expenditures or an income distribution strategy specifically designed to combat the sequence of returns risk. 

Here are a few points to consider when sourcing retirement income from a portfolio.

Understand How Market Volatility Impacts Your Retirement

It starts with understanding what risk means to your retirement security. Suppose you have a limited pool of savings relative to expected income needs. In that case, you are a constrained investor and need to approach spending from a portfolio differently from someone with more or less available assets.

Assess Your Appetite for Market Volatility

Determining how you will react in weak and strong markets is essential. While it's easy to remain committed in a bull market, that may not be the case when the markets are in turmoil. If you become easily rattled or resist spending cuts because of poor market performance, a strategy relying on market returns to generate income may not be appropriate.

Assess Your Retirement Income Preference

How much income flexibility do you have? Is there a plan for how to spend during a down market? How much volatility can you stomach? A low-risk strategy like Time Segmentation offers more reliable and steady sources of income that will appeal to those with a limited appetite for market risk. In contrast, a riskier total return strategy will resonate with those able to stomach market volatility. Understanding your preference for drawing money from your savings is crucial to choosing an appropriate income distribution strategy.  

Know the Income Distribution Strategies

While there are many approaches to creating retirement income, there are just 4 main income strategies, defined mainly by how each aligns with the 4 retirement income styles of safety-first, probability, commitment, and optionality. Learn more about these strategies in One retirement mistake that can ruin retirement

  • Total Return (probability-based & optionality) relies solely on market returns to generate income (i.e., the 4% rule).
  • Income Protection (safety-first & commitment) builds a lifetime income floor with Social Security, pensions, and income annuities to fund spending.
  • Risk Wrap (probability & commitment) uses secure income sources to create a lifetime income floor wrapped around aN investment portfolio to source income.
  • Time Segmentation (safety-first & optionality) matches short-term spending needs with certain assets and long-term spending needs with less certain assets to generate income.

Select, Implement and Commit to a Strategy

The best retirement spending strategy is one you’ll stick with regardless of what’s going on in the market. Consequently, understanding its strengths and weaknesses and how comfortable you are with how it generates income is a crucial step. Next, there’s simply too much at stake with retirement income planning to go it alone or work with someone unfamiliar with it, so you’ll want to work with a financial professional skilled in income distribution planning and familiar enough with the intricacies of your strategy to ensure it’s properly implemented. Choosing the right system and working with a skilled financial professional are two things you can do to ensure you have the income you need when you need it.


The whole point of saving for retirement is to fund spending during retirement. But if you have recently retired, you’re probably highly anxious about the impact of market volatility on your savings and retirement standard of living. No one wants to run out of money before the end of retirement. For retirees who depend heavily on market returns for retirement income, untimely withdrawals during a series of lousy market returns can seriously threaten long-term retirement financial security.