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Planning for the Worst for Your Retirement Portfolio


Experiencing a market downturn when you first begin to withdraw your retirement funds can have a dramatic negative effect over time on the value of your portfolio. As part of your overall financial plan you should "stress test" your portfolio before you retire.

Much has been written on “safe withdrawal rates,” but in addition to having enough money for retirement and figuring out how much is safe to withdraw per year, there is another concept, called the sequence of returns — which some call “the luck factor” — to figure into the equation.

Experiencing a market downturn when you first begin to withdraw your retirement funds can have a dramatic negative effect over time on the value of your portfolio.

It’s important to note that, in the absence of deposits or withdrawals, the sequence of returns over any period of time has no influence on the ending portfolio value at the end of that period. It’s only when you introduce deposits and withdrawals — and, in retirement, most of us will be making net withdrawals — that the sequence matters.


Starting with a portfolio of $1 million and assuming a compound average annual return of 5% after taxes, that portfolio will grow to $1,628,895 at the end of 10 years in the absence of deposits and withdrawals. This is quite clear if the return each year is exactly 5%.

However, in each individual year, the return will likely differ from 5%, with some years higher and some years lower. If two different investors each own a portfolio with those characteristics, and Investor A happens to have all the bad-return years early, and Investor B happens to have all the bad-return years late, it doesn’t matter — they will still both end up with $1,628,895 at the end of 10 years.

Now let’s introduce withdrawals, and assume that our investors each need to spend $50,000 annually out of their portfolios. If each portfolio returns exactly 5% each year, then the investment growth will exactly offset the needed withdrawal amount each year, and the investors will each end up with the $1 million they started with.

In reality though, the returns will likely vary from year to year. In that case, the results will be quite different for our two investors. In fact, it would not be at all unusual for Investor A (the one with the bad-return years early) to see his portfolio shrink to below $700,000, or for Investor B (the one with the bad-returns years late) to end up with more than $1.2 million.

There is no guarantee that you won’t be Investor A when you begin your retirement. Talk about starting your retirement off on the wrong foot!

So, what can you do? While you can’t control the market’s behavior when you decide to retire, if the market does experience a downturn at that inopportune time, you could reduce your cost of living, at least temporarily, and/or seek some part-time employment.

But the better, more forward-looking approach is to “stress test” your retirement portfolio as part of an overall financial plan — before you retire. When analyzing the lifetime cash flow projections we do for our clients, we often include — in addition to the typical Monte Carlo simulations and probability analyses — a “what if” scenario assuming an immediate 30% drop in the equity markets, to see if the clients can still maintain their desired lifestyle throughout their retirement. This helps them make their retirement decision in a much more informed manner.

As always, consult your financial advisor for more detailed information as well as guidance on what might be most appropriate for you in light of your personal situation and goals.

Janet Critchley is a financial analyst with Brinton Eaton Wealth Advisors, an SEC-registered investment advisory firm in Madison, N.J. She can be reached at or 973-984-3352. For more information, visit

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