How to protect your retirement accounts during market volatility

ARTICLE | April 29, 2025

Authored by Schlenner Wenner & Co

Periods of market volatility can feel unsettling, especially for those nearing or entering retirement. When account balances swing sharply in a short time, it's natural to worry about the security of your long-term financial plans.

For most investors, temporary market declines are part of a normal economic cycle — and retirement accounts are designed to weather ups and downs over decades. However, if you are within five years of retirement, or if you have recently retired and begun drawing income, market turbulence can feel far more disruptive. The stakes are higher, and the window for recovery is shorter.

Fortunately, there are strategic actions you can take to strengthen your retirement plan, build resilience, and reduce uncertainty — no matter what the markets are doing today or tomorrow.

Market cycles

Financial markets move in cycles, and periods of volatility are inevitable. Whether triggered by economic uncertainty, global events, policy changes, or unexpected shocks, market downturns can happen suddenly and sharply.

Historically, markets have recovered from downturns over time, often rewarding those who remain patient and disciplined. However, for those needing to withdraw funds soon, sequence of returns risk becomes a critical factor. Managing this risk thoughtfully can help protect the longevity of your retirement savings.

What is sequence of returns risk?

Sequence of returns risk refers to the danger of experiencing poor investment returns early in retirement, just as you begin making withdrawals. Even if the average return over time is reasonable, taking money out during a market downturn can permanently reduce your portfolio’s value and limit its ability to recover.

Consider two retirees, each starting with $1 million and withdrawing $50,000 per year. Retiree A faces a major market downturn early in retirement, reducing their portfolio by 20% in the first year. Retiree B experiences strong early returns, with a downturn happening much later.

Even though both may average the same returns over 20 years, Retiree A’s portfolio is likely to run out of money years earlier because early losses, combined with withdrawals, create a much steeper decline.

Managing this risk through smart withdrawal strategies, maintaining adequate cash reserves, and ensuring a properly diversified portfolio is essential to protecting long-term financial security.

Proactive steps for retirement resilience

Segment your portfolio by time horizon

One way to manage both the financial and emotional stresses of retirement investing is to organize your portfolio according to when you’ll need to use the money. This approach, often called the “bucket strategy,” divides your assets into three parts based on time horizon.

Short-term bucket

The first bucket covers short-term needs — generally one to three years of essential living expenses — and should be held in cash, high-yield savings accounts, or short-term government bonds. This can help protect your near-term income and prevent forced investment sales during downturns. 

Mid-term bucket

The second bucket typically covers the next three to seven years. Here, a mix of high-quality bonds and dividend-paying stocks offers a balance of income generation and moderate growth. This portion of the portfolio acts as a bridge, gradually replenishing the first bucket while providing some insulation against inflation.

Long-term bucket

The third bucket is your long-term growth engine, reserved for money you won't need to touch for at least seven years or more. This portion remains invested in a diversified stock portfolio, positioned to capture higher long-term returns. Because this money is intended for use well into the future, it has time to recover from market volatility and benefit from compounding growth.

This strategy can help reduce the temptation to react impulsively during market declines. Knowing that your short-term income is already secured allows you to view downturns in the stock portion of your portfolio with greater patience and perspective.

In practice, retirees often "refill" their short-term bucket by periodically harvesting gains from the long-term growth bucket during strong market years. In weaker years, they may simply let the short-term and mid-term buckets cover their needs without tapping into stocks, giving the growth bucket time to recover.

Of course, this approach is one of many, and it’s best to consult a professional to devise a strategy that fits your personal risk profile. 

Create a dynamic withdrawal plan

Retirement accounts are not “set it and forget it.” Retirees who regularly monitor their portfolios and adapt to changing conditions tend to enjoy stronger financial outcomes, while those who neglect to adjust may face greater risks over time.

Rigid withdrawal strategies — like sticking to a fixed annual withdrawal no matter what — can become risky in volatile markets. If you keep withdrawing the same amount during a market downturn, you risk depleting your portfolio much faster than expected.

Instead, a dynamic withdrawal strategy adjusts based on how your portfolio is performing. In strong market years, you might withdraw slightly more to fund discretionary expenses like travel or home upgrades. In weaker years, you pull back on non-essential withdrawals, covering only the basics and deferring larger expenses until your investments recover. This flexibility can extend the life of your savings. 

One approach many financial planners recommend is the “guardrails” withdrawal strategy. Essentially, you set a target withdrawal rate (say 4% of your initial portfolio value) and define guardrails that trigger action. For instance, if your portfolio value drops by 10%, you may decrease your withdrawals to preserve capital. This method helps retirees adjust automatically without making emotional, spur-of-the-moment decisions. 

Once required minimum distributions (RMDs) begin, you must withdraw at least a minimum amount each year—limiting your flexibility to reduce withdrawals. However, you can still adjust your discretionary spending and reinvest any unneeded distributions to maintain portfolio resilience. 

Build a dedicated cash reserve

Having 12 to 24 months' worth of living expenses in a high-yield savings account or short-term Treasury funds can prevent you from having to sell investments during a downturn. This cash "buffer" acts as your personal safety net, buying you time for the markets to recover.

A simple rule of thumb: cover your essential expenses (housing, healthcare, groceries) with your cash reserve, and allow more discretionary spending to be funded through investments as conditions improve.

Review and adjust your retirement timeline if needed

Also, recognize that retirement dates are not set in stone. If markets remain volatile and you have flexibility, delaying retirement by even 6–12 months can significantly strengthen your financial position.

Working an additional year could help you avoid withdrawals during a downturn, increase your Social Security benefits, and add a full year’s worth of savings to your portfolio. Even partial or phased retirement - such as shifting to part-time work - can provide continued income while reducing financial pressure, smoothing the transition. 

Adapting your retirement plan with confidence

Short-term market volatility can feel unsettling, but your long-term goals don't have to change. With the right strategies, you can adapt to shifting conditions without losing sight of the bigger picture.

Every retirement plan is different. A certified financial planner can help you assess your position, evaluate tax-efficient strategies, and adjust your approach if needed. If you’re concerned about how recent market changes may affect your retirement, now is the right time to seek expert guidance.

Contact us to learn how we can help you move forward with clarity and confidence.

This article is intended for informational purposes only and should not be construed as financial, investment, or tax advice. Please consult a qualified financial advisor or CPA before making decisions based on your individual circumstances.