One Critical Mistake to Avoid When You Retire

Let’s assume you’re ahead of your peers. You’ve saved, invested, and reduced your debts. Maybe you’ve even met with a financial professional to review your retirement income options. But if you rely solely on traditional strategies, you may still find yourself at a disadvantage in retirement.

Preparing for your financial future requires accounting for factors beyond your control. While you can choose a target retirement date and budget for monthly income, projecting portfolio returns, life expectancy, taxes, inflation, and health care needs involves a significant degree of uncertainty. Even a small error in these assumptions can derail your plan. In my experience, the most problematic factor is the assumed average rate of return on investments.

 

The Flaw of Averages

Mark Twain once remarked that there are “three kinds of lies: lies, damned lies, and statistics.” Numbers can tell almost any story, depending on how they are interpreted.

Consider this example:

Suppose your retirement portfolio suffers a 40% loss in a downturn similar to 2008. If your portfolio was worth $1 million, it would fall to $600,000. The following year, a 40% rebound would lift the balance to $840,000—not back to your original $1 million. Although the average rate of return over those two years is zero, the actual rate of return is negative 16%.

This distinction matters. Many financial plans, however, rely on averages that may paint a misleading picture. Markets are volatile, not smooth or predictable. A sound retirement plan must recognize this reality.

Experience shows that the five years before and after retirement are especially vulnerable to market volatility. At that point, your savings are at their highest—and therefore at greatest risk. In 2008, many people planning to retire were forced to delay their plans or accept a lower standard of living. Losses near retirement can carry long-lasting consequences, yet many investors still rely on “age-appropriate” stock-and-bond mixes that may fail to protect against critical timing risks.

 

Keeping It Real

Some seasoned investors may wonder: why worry about market swings? Isn’t patience the key to weathering volatility? After all, panic selling is often the real culprit.

The truth is, timing changes everything. When you’re working, a market decline hurts—but you still have a paycheck and contributions that help your portfolio recover. Near or in retirement, however, the story is different. A market drop reduces not only your account value but also the income you rely on. Worse, withdrawals during downturns lock in losses and limit recovery.

 

A Better Plan

A strong retirement plan should be designed to withstand volatility while delivering income when you need it, regardless of market conditions. Nobody wants to be forced back into the workforce or downsize their lifestyle because of poor timing. Mitigating volatility risk is essential to staying on track.

This doesn’t mean abandoning the market. Stocks remain important for long-term growth. But it may be wise to diversify into assets with low correlation to equities—such as bonds held to maturity or annuities with principal protection, backed by financially strong insurers. The goal is to hedge against short-term risk while preserving your income stream.

We are now more than a decade into one of the longest bull markets in history. The S&P 500 has averaged annual returns of about 15% during this stretch. It’s tempting to assume the good times will continue, but the market won’t send a warning before heading in the opposite direction.

Here’s how to get started:

• Assess the impact of a market downturn on your retirement plan.
• Identify the rate of return your portfolio must achieve to sustain your retirement income.
• Compare scenarios. If you only need a 3% return versus 6% to meet your goals, you’ll approach risk differently. This awareness empowers you to balance growth-oriented and safety-oriented strategies effectively.

To all the diligent savers: do yourself a favor—leave averages to baseball statisticians. Your financial future is too important to leave to chance.

From a professional perspective, balance is essential. Investors should acknowledge the likelihood of near-term relief from a September cut, while preparing for slower or more limited action thereafter. A resilient but decelerating economy, conflicting growth signals, and diverging volatility highlight the importance of diversification and disciplined risk management.

For those allocating fresh capital, approaching September as a month of both opportunity and caution may be the most prudent strategy. If inflation proves contained and the Fed maintains a steady hand, equities could extend their rally. But a hotter CPI would likely inject volatility across markets, reminding investors why patience and preparation remain vital.

 

This material is published and distributed by Financial Media Exchange for informational and educational purposes only. It is not intended as investment advice or a recommendation to buy or sell any security.

Investing involves risk, including the potential loss of principal. Past performance is not indicative of future results. Investment returns and principal value will fluctuate, and you may have a gain or loss when you sell your investment. Current performance may be higher or lower than the performance data quoted

The information presented is believed to be reliable but is not guaranteed. You should consult your own financial professional before making any investment decisions.

This content complies with SEC and FINRA guidelines for educational communications and does not promote any specific products or strategies.

 

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