Close Close

Retirement Planning > Retirement Investing

Defending Against a Downturn: Strategies in Early Retirement

Your article was successfully shared with the contacts you provided.

Periods of market unrest are common and can wreak havoc on any portfolio – but especially in the first few years of retirement, when withdrawals are being made, as opposed to before retirement. As such, advisors need to make their clients aware of the value of retirement planning to head off the very real risk of market volatility early in retirement.  

Despite that risk, most clients – particularly affluent consumers with greater market investments – may have the misperception that they are immune to market shocks. Despite the inevitability of downturns, they believe their portfolio will have time to recover, as it has in the past.

Psychologists have a name for such a tendency: “optimism bias.” In short, people naturally believe that they’re unlikely to experience a negative event as compared with someone else. Unfortunately, optimism bias can do significant damage – particularly in financial planning and retirement. But there are a number of ways that advisors can help clients plan for the risk of a market downturn early in retirement and defend against it – including looking into life insurance strategies.

Sequence-of-returns risk: Why is it higher in early retirement?

Volatility poses a much greater risk in early rather than mid to late retirement. This is called sequence, or sequence-of-returns, risk – the risk of taking withdrawals from an investment with poor returns.  

When an extreme market event happens early in retirement, the long-term effects can be devastating. Simply put, a client’s portfolio will have no time to recover when that client is actively taking withdrawals. What’s more, the client’s portfolio might never recover, especially if other unexpected expenses mount (e.g., medical bills).

According to the Prudential research report “The ‘When to Retire’ Decision: Impact on Retirement Security and Workforce Management”:

  • Individuals tend to retire in strong-performing markets – and are more likely to experience negative equity returns immediately afterward.
  • Between 1926 and 2010, there were higher odds of a negative year for the S&P 500 after a three-year period of strong performance.

That means the likelihood of an early retirement downturn could be higher than your clients previously believed. Unfortunately, there’s no crystal ball for the exact state of the market in 10 or 20 years. But while no one can predict if volatility will strike early in retirement, it is eventually inevitable.

Effective strategies to protect investments

Luckily, there are a few ways to offset sequence risk. Smart planning can help protect your client’s life savings and assets from a volatile and unpredictable market. Clients can also proactively hedge against market volatility in early retirement to ensure their investment is well-protected. Most importantly, these strategies are flexible depending on the client’s needs and goals.

  • For clients who also need death benefit protection for their family, Buy permanent life insurance while working and potentially build up the policy’s cash value. While the primary purpose of life insurance is the death benefit, it is an incredibly versatile product that can serve as a  cushion to help prepare for the unexpected. For one, the policyholder can take a loan against the policy, up to its cash value, with typically no tax consequences – and suspend withdrawals from their portfolio while the market is down. This can help reduce the impact of market volatility to the overall investment portfolio. However, this will reduce or may eliminate the death benefit available to the clients heirs.
  • Clients might consider keeping a few years’ expenses in liquid assets. This can help them avoid selling off equities in the event of a downturn (i.e., selling low). Liquid assets might miss out on market upside, but they can serve as a cushion that allows the client to delay equity withdrawals for at least a year or two, allowing the portfolio time to recover if necessary.
  • A diversified portfolio can also help offset market shocks. Different types of assets with distinct return patterns can support a portfolio built to withstand economic swings, making it less likely that the client will experience a devastating loss in any one area.
  • Advisors can look at where the money is going to help clients actively decrease expenses in the event of an early retirement market decline. Your client may need to reduce retirement expenses, especially in the event of a serious market dip. They could also work part time to decrease their reliance on withdrawals, but the advisor should explain how doing so might effect Social Security benefits and income taxes.

The market is unpredictable. The cash value of permanent life insurance, however, can act as a stopgap during times of economic upheaval, providing supplemental funds for retirement expenses as needed.

For more information on market volatility and how adding more life to your client’s retirement portfolio can help guard against undue risk, visit

Life insurance is issued by The Prudential Insurance Company of America, Newark, NJ and its affiliates. Life insurance policies contain fees and expenses, including cost of insurance, administrative fees and premium loads, surrender charges and other charges or fees that will impact policy values. Life insurance policies contain exclusions, limitations, reductions in benefits and terms for keeping them in force. A financial professional can provide you with costs and complete details.