Ask an Advisor: We're in our late 50s and plan to retire in the next several years, but most of our savings is in the market. How do we protect our wealth from a downturn this close to retirement?

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Ask an Advisor: We’re in our late 50s and plan to retire in the next several years, but most of our savings is in the market. How do we protect our wealth from a downturn this close to retirement?

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The risk you’re describing has a name: sequence-of-returns risk. It’s one of the biggest risks facing people who are about to retire, yet most people have never heard of it because so much attention is placed on chasing returns rather than protecting the retirement they’ve worked so hard to build.

Here’s the core idea. Imagine two couples who both earn the exact same average investment return over thirty years. One experiences a major market downturn in the middle of retirement, after their portfolio has had decades to grow. The other experiences that same downturn right before retiring or during their first few years of retirement. Even though their average returns are identical, the second couple can end up with significantly less money because they’re forced to withdraw from their investments while the market is down. Those shares are sold at lower prices and no longer have the chance to recover when the market rebounds. That’s why when the losses happen can be just as important as how much the market returns over time.

The goal isn’t to avoid every market downturn because that’s not possible. Rather, the goal is to build a retirement plan that can withstand one if it happens at the worst possible time.

So here’s where I’d focus.

First, determine what your money actually needs to do. How much do you expect to spend each year, and where will that income come from? Many couples discover they don’t need to take as much investment risk as they did while they were building wealth. As retirement approaches, the objective shifts from growing your portfolio to making sure it can reliably support the lifestyle you want.

Second, build an appropriate spending reserve. One of the most effective ways to reduce sequence-of-returns risk is to have a portion of your portfolio in assets that are less sensitive to market volatility, such as cash equivalents. That reserve can provide spending flexibility during a market decline so you aren’t forced to sell stocks at lower prices. How much to hold depends on your spending needs, other income sources, and your overall financial plan.

Third, remember that retirement may last thirty years or more. One of the biggest mistakes I see is treating every dollar as though it has the same job. The money you’ll likely spend over the next few years shouldn’t be invested the same way as the money you may not touch for twenty or thirty years. Near-term spending generally belongs in more stable investments, while long-term assets still need the opportunity to grow and outpace inflation.

Fourth, investment management needs a disciplined process. One of the most valuable parts of an investment strategy is having a written process that outlines how decisions will be made before emotions get involved. That process should define when you’ll rebalance, how you’ll respond during market declines, and under what circumstances, if any, changes to the portfolio are appropriate. During every major market correction, it feels like “this time is different.” That’s exactly why investment decisions should be guided by a thoughtful process rather than driven by market noise or emotional reactions.

Fifth, stress-test your retirement before you retire. This is the step many people skip. Use your actual accounts, expected spending, retirement date, and income sources to model what happens if a significant bear market occurs during your first few years of retirement. If the plan still works under that scenario, your confidence is based on analysis rather than hope. If it doesn’t, you’ve identified an opportunity to make adjustments while you still have time and flexibility.

There’s another area where I see people make expensive mistakes. Annuities and insurance-based investments are often marketed as solutions for market downturns. Some can absolutely play a valuable role in the right situation, but many come with costs or trade-offs that aren’t fully understood until after they’re purchased. Before making that decision, make sure you understand exactly how the product works, what it costs, and what you’re giving up in return. As a fee-only fiduciary, I don’t sell these products, so my role is simply to help clients evaluate whether they fit their goals.

One of the biggest mindset shifts as you approach retirement is realizing that success is no longer about earning the highest returns. It’s measured by having a plan that allows you to continue living the life you want, even when the market doesn’t perform the way you expected. A well-designed retirement plan won’t eliminate market downturns, but it can make them far less disruptive. When your investments, withdrawal strategy, tax plan, and cash reserves are designed to work together, you’re much less likely to feel like every market headline requires a reaction. That’s the kind of confidence most people are really looking for as they transition into retirement.

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