If $1.26 million is Fortune’s answer to retirement security, then the forecast may need to be revised.
Even Northwest Mutual’s seven-figure starting point can seem illusory because some retirees are still at risk of depleting their savings by their 70s (1). They can also hit $0 years before their retirement ends, leaving them hanging on to an unpleasant final season.
Add to that the challenge of approaching that number more than a crapshoot in your mid-60s. And risk has nothing to do with discipline, spending habits or even debt. Instead, the main culprit is simply bad timing.
Here’s how you can avoid the risk of losing your solid nest egg.
Experiencing a major market correction can have a devastating and long-lasting impact on your retirement savings. According to the MIT Sloan School of Management, this is known as risk of return (2).
Consider the example of Ian, a 60-year-old with an investment of $1 million. Ian’s assets are in stocks, and he plans to withdraw $60,000 a year. But his plans would be hampered by a severe economic crisis in his first two years.
Say the market falls 35% in the first year and 25% in the second year. By withdrawing $60,000 in both years, Ian increased his savings. He is effectively selling stocks while they are selling low. At the end of the second year, he is left with only $413,250 – less than half of his initial wealth.
The market may return 7% to 8% annually for the rest of Ian’s life, but he still ends up with $0 at age 71. His portfolio cannot withdraw $60,000 a year after the first hit.
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In retirement, the timing of market corrections is more important than their size. A sharp drop is painful. But when it happens in retirement, it can cause permanent damage.
It is manageable later in retirement. If Ian had experienced a 35% and 25% decline in his 70s, rather than his late 60s, his portfolio would have benefited from several additional years of compound growth. These previous gains would have created a large capital base, helping to absorb a portion of the losses without immediately threatening his income.
