How to Navigate Retirement Planning in a Volatile Market
Market volatility is a permanent feature of investing, not an occasional visitor. What changes is your exposure to it. A 30-year-old adding to a 401(k) through a 20 percent drawdown is buying at lower prices. Someone three years from retirement, drawing from the same portfolio, is doing the opposite. The math is identical. The consequences are not.
That difference has a name. Sequence of returns risk describes what happens when poor market returns arrive early in retirement, at the exact moment you begin withdrawing. Two retirees can experience the same average return over 30 years and end up in very different places, purely because of the order in which those returns arrived. This is the risk that keeps planning conversations honest, and it is the reason a retirement plan needs to be built around withdrawals, not just around growth.
360 Financial works with families across the Twin Cities metro, from our Wayzata office and our Elk River office, who are living exactly this transition. Below is how we approach it.
Start With the Withdrawal, Not the Allocation
Most people begin with the question "how should my money be invested?" The more useful first question is "what will I actually need to withdraw, and when?"
Once you can answer that in dollars and dates, the allocation question largely answers itself. Money you plan to spend in the next two years has no business being exposed to equity volatility. Money you will not touch for 15 years has no business sitting in cash, where inflation quietly erodes it.
For most households approaching retirement this means mapping three things before touching the portfolio:
Fixed income needs: the baseline of housing, food, insurance premiums, property taxes and health care that arrives whether markets cooperate or not.
Flexible spending: travel, gifts to family, a lake place, a vehicle replacement. Spending that can move a year in either direction without harming anything.
Contractual income: Social Security, any pension, annuity income. Whatever arrives regardless of market conditions.
The gap between fixed needs and contractual income is the number that has to come out of the portfolio every year, in every market. That number, not a rule of thumb, sets your allocation.
The 60/40 Portfolio Is a Starting Point, Not an Answer
The traditional 60 percent equity and 40 percent bond mix was never designed for a specific household. It is an average, and averages are a poor fit for retirement, where your personal sequence of returns is the only one that matters.
A retiree withdrawing 3 percent a year with a pension covering most fixed costs can carry meaningfully more equity exposure than a retiree withdrawing 6 percent with no other income source. Same age, same balance, very different appropriate allocation.
What we look at instead of a default mix:
Withdrawal rate as a percentage of the portfolio, which is the single most informative number in the plan.
Time until the first withdrawal, since a portfolio with five years of runway behaves differently from one funding a withdrawal next month.
Tax location, meaning which assets sit in taxable, tax-deferred and Roth accounts, because that determines your flexibility during a downturn.
Total household picture, including real estate equity, business interests and any concentrated stock position from a career at a Twin Cities employer.
Build a Cash Buffer So You Never Have to Sell Low
The most practical defense against sequence of returns risk is boring. Hold enough short-term reserves that a market decline never forces a sale.
For most retired households we look at 12 to 24 months of portfolio withdrawals held in cash and short-term fixed income. In a normal year, withdrawals come from rebalancing gains. In a year when equities are down sharply, withdrawals come from the buffer instead, and the equity side is left alone to recover on its own schedule.
This is not market timing. Nothing is being predicted. The buffer simply removes the need to make a decision at the worst possible moment, which is the moment when decisions are hardest to make well.
The trade-off is real and worth naming. Cash earns less than equities over long periods, so a buffer has a cost. What you receive in exchange is the ability to leave a long-term portfolio untouched during exactly the periods when selling it would do the most lasting damage.
Volatility Creates Tax Planning Opportunities
Down markets are unpleasant to live through and useful to plan around. Several strategies are only available, or only attractive, when values are lower.
Tax-loss harvesting. Selling a position at a loss and reinvesting in a similar but not substantially identical holding lets you capture the loss for tax purposes while staying invested. Those losses offset realized gains elsewhere in the portfolio, and unused losses carry forward. The wash sale rule requires care here, which is why this is a coordinated exercise rather than a do-it-yourself one.
Roth conversions. Converting a portion of a traditional IRA to a Roth IRA is a taxable event, and the tax is calculated on the converted value. When account values are lower, the same number of shares moves across at a lower tax cost. For households in a low-income window, often the years between retirement and the start of required minimum distributions, this can be one of the more consequential decisions available.
Charitable giving structure. Appreciated positions, qualified charitable distributions from an IRA after age 70 and a half, and donor advised funds all interact with market levels and with your tax bracket in a given year.
Rebalancing discipline. A portfolio that has drifted meaningfully away from target is telling you to sell what has held up and buy what has fallen. That is uncomfortable and it is the mechanism by which a rebalanced portfolio works.
Each of these depends on your specific bracket, your state tax situation as a Minnesota resident, and what else is happening in your financial life that year. There is no version of this that is right for everyone.
What We Would Look At First
If you are within five years of retirement, or recently retired, and market conditions have you reconsidering the plan, these are the questions we would work through with you:
What is your actual withdrawal rate, calculated in dollars rather than estimated as a percentage?
How many months of withdrawals are currently held in short-term reserves?
Where are your assets located across taxable, tax-deferred and Roth accounts, and does that give you flexibility in a down year?
When do you intend to claim Social Security, and has that decision been coordinated with your withdrawal plan rather than made separately?
Is there a written plan describing what you will do in a 20 percent decline, agreed to before it happens rather than during it?
The last one matters more than it looks. Most damage to retirement outcomes is not caused by market declines. It is caused by decisions made in the middle of them.
Start the Conversation
Schedule a 15-minute call with a 360 Financial advisor to review your retirement income plan. We have offices in Wayzata and Elk River and work with families throughout the Twin Cities metro.
Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC.
The information in this material is not intended as authoritative guidance or tax or legal advice. Content is derived from sources believed to be accurate. LPL Financial makes no representation as to its completeness or accuracy.
Ready to talk it through? Schedule a free 15-minute introductory call with the 360 Financial team.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 1/2 or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.
Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.
