Retirees face increased risks from early stock market dips

Financial experts warn that stock market dips can significantly hurt retirees, especially in their early years of retirement. This period is often referred to as the "danger zone" for managing withdrawal strategies. Many retirees do not plan for this risk, known as “sequence of returns risk.” The timing of withdrawals during a market downturn can have lasting effects on a retiree's savings. Amy Arnott, a portfolio strategist at Morningstar, explains that if retirees withdraw funds while the market is falling, they may not have enough left to benefit when the market eventually rebounds. This can increase the risk of running out of money in retirement. For example, if a retiree's portfolio loses 15% in the first year and they withdraw 3.3% of their savings, their risk of exhausting their funds within 30 years is six times higher than if they had a positive return in that first year. This is due, in part, to the lost opportunities for investment growth that occur when withdrawals happen during downturns. To mitigate these risks, experts recommend a balanced asset allocation. A mix of 60% stocks and 40% bonds can help reduce the impact of market volatility. Adjustments should consider individual risk tolerance and retirement goals. Another effective strategy is the “bucket approach.” This involves keeping one to two years of living expenses in cash for immediate access and placing the following five years of expenses in bonds. The remainder can be invested in growth-oriented stocks. This method can provide retirees with more security during downturns and help manage their withdrawal strategies effectively.