The Strategy that Helped You Accumulate Wealth May Not Work in Retirement
Passive investing can be a powerful way to build wealth. But the investment strategy that carries you to retirement may not be the one that helps you recreate your paycheck in retirement.
When Jack Bogle launched the first index mutual fund for individual investors in 1976, he challenged the conventional belief that investors needed expensive money managers to beat the market. His philosophy was refreshingly simple: own a broad piece of the market, keep costs low, resist emotional decisions, and allow compounding to work over time.
For millions of long-term investors, low-cost index funds and passive investing have worked remarkably well. Index funds typically offer broad market exposure and lower expenses than actively managed funds. Those lower costs matter because fees reduce the amount of money left in your portfolio to compound.
But there is an important catch.
Investment returns shown on a chart assume that the investor remains invested. Real people do not always behave that way. Fear, uncertainty, and market volatility can lead investors to sell during a correction—often at precisely the wrong time.
That is the difference between an investment’s return and the return an investor actually experiences.
For a 30-year-old saving for retirement over the next three decades, a passive investment strategy may work very well—provided that person continues investing and stays committed during market declines.
Retirement changes the equation. Once your paycheck stops and portfolio withdrawals begin, a falling market is no longer simply an opportunity to buy shares at lower prices. It may force you to sell them.
The strategy that helped you accumulate wealth is not necessarily the strategy that will help you preserve it.
Why Market Declines Can Help Younger Investors
One of the greatest advantages younger investors have is time.
While you are working, earning a paycheck, and making regular retirement contributions, a market decline can become an opportunity rather than a disaster. That may sound backward. Why would anyone want the value of an investment account to fall?
The answer lies in one of the most useful long-term investing disciplines: dollar-cost averaging.
What Is Dollar-Cost Averaging?
Dollar-cost averaging means investing the same amount of money at regular intervals, regardless of whether the market is rising or falling.
Suppose you contribute $1,000 to your retirement account on the first day of every month. You do not attempt to predict the market’s next move or wait for the “perfect” time to invest. You simply follow your retirement savings plan.
When investment prices are high, your $1,000 buys fewer shares. When prices are low, it buys more.
Consider a simplified example:
- At $100 per share, a $1,000 contribution buys 10 shares.
- At $50 per share, that same contribution buys 20 shares.
Without having to make a new decision, you automatically purchase more shares at the lower price.
Of course, dollar-cost averaging does not guarantee a profit or protect against investment losses. It can also produce a lower return than investing a lump sum immediately when markets rise steadily.
Its greatest benefit may be behavioral rather than mathematical. Dollar-cost averaging gives investors a disciplined process. Instead of asking, “Should I invest this month?” they continue investing according to plan, reducing the temptation to act on fear, excitement, or short-term market predictions.
Think about how differently people respond to falling prices in everyday life. If a dealership cuts automobile prices by 30%, shoppers may rush in to find a bargain. If the stock market falls by 30%, many of those same people see only danger.
During the wealth-accumulation years, lower prices can allow patient investors to acquire more ownership in diversified investments and financially sound businesses.
Retirement Reverses the Advantage
Everything changes when you retire and need your portfolio to recreate your paycheck.
A market decline can be uncomfortable at any age. In retirement, it can become permanent damage when monthly withdrawals force the sale of investments that are temporarily down. That is the central concern behind the dangers of passive investing in retirement – reverse dollar cost averaging: retirees may sell more shares when prices are low and fewer shares when prices are high, weakening the portfolio’s ability to recover.
For an investor still earning a paycheck, a downturn may create an opportunity to keep contributing and buy at lower prices. A retiree drawing income faces the opposite equation. The portfolio is no longer simply growing. It is paying the bills.
The Retirement Risk Hidden in Routine Withdrawals
Reverse dollar cost averaging occurs when an investor systematically withdraws money from an investment account. If the account value falls, the retiree must sell a larger number of shares to generate the same dollar amount of income. Those shares are no longer available to participate in a future recovery.
Consider a retiree who needs $5,000 from a stock fund. At $100 per share, that withdrawal requires selling 50 shares. If the fund falls to $50 per share, the same withdrawal requires selling 100 shares. The income need has not changed, but the number of shares removed from the portfolio has doubled.
This is why average long-term returns can be misleading for retirees. Two portfolios can earn the same average return over 20 years and produce very different outcomes depending on the order in which gains and losses occur. Poor returns early in retirement, combined with regular withdrawals, are often called sequence-of-returns risk.
This is one of the most serious—and frequently underestimated risks when attempting to recreate your paycheck in retirement.
What Is Sequence-of-Returns Risk?
Sequence-of-returns risk is the danger that significant investment losses will occur early in retirement, while you are making regular portfolio withdrawals.
Once withdrawals begin, the order in which investment gains and losses occur can matter almost as much as the portfolio’s average return.
Imagine two retirees who begin with the same amount of money and earn the same average annual return over 20 years. One experiences strong investment returns early in retirement and losses later. The other suffers major losses during the first few years while continuing to withdraw money.
Their average returns may be identical, but their outcomes can be dramatically different.
The second retiree may need to sell more shares during the downturn, permanently reducing the number of shares available to benefit from the eventual recovery. This combination of early losses and ongoing withdrawals can significantly shorten the life of a retirement portfolio.
That is why retirement income planning requires more than choosing investments with an attractive historical average return.
Your Portfolio Has a New Job in Retirement
During your working years, your portfolio’s primary job is to accumulate wealth.
In retirement, it must perform several jobs at once:
- Generate dependable retirement income.
- Preserve enough capital for future needs.
- Maintain sufficient liquidity for near-term expenses.
- Manage market and sequence-of-returns risk.
- Continue growing enough to help offset inflation.
- Support a retirement that could last 20, 30, or even 50 years.
Those competing demands make retirement portfolio management fundamentally different from saving for retirement.
Why Passive Investing Can Magnify the Problem
Passive investing is not inherently unsuitable. Low-cost index funds can be useful tools, particularly for long-term investors who are accumulating assets and can tolerate meaningful market declines. The concern arises when a retirement plan relies entirely on a buy-and-hold allocation without a clear process for managing downside risk, cash needs, and withdrawals during a bear market.
A traditional passive portfolio may rebalance periodically, but rebalancing alone does not necessarily address the practical question a retiree faces in a sharp decline: Which assets should be sold to fund the next several months or years of spending?
Selling depressed stock holdings simply because an automatic withdrawal is due can turn a paper loss into a realized loss. Repeated sales during an extended downturn may leave a portfolio with too little capital to fully benefit when the market recovers. Inflation makes the issue more difficult because spending needs often rise even when account values are under pressure.
Recreating Your Paycheck in Retirement
A retirement investment strategy should connect portfolio decisions to the household’s actual cash-flow needs. That begins with identifying essential expenses, discretionary expenses, pension or Social Security income, tax obligations, and the amount of reliable cash available outside the market.
Some retirees choose to hold a dedicated reserve for near-term withdrawals so they are less likely to sell stocks after a sudden decline. Others use a more flexible spending policy, reducing discretionary distributions after weak market periods. Neither approach eliminates risk, and keeping too much in cash can create inflation risk, but both can reduce the pressure to sell investments at unfavorable prices.
The right approach depends on the household. A retiree with substantial guaranteed income, modest withdrawals, and a large portfolio may have greater capacity to withstand volatility than someone relying heavily on investment distributions. Taxable accounts, IRAs, required minimum distributions, concentrated stock positions, and charitable goals can also change the appropriate withdrawal strategy.
Passive investing and low-cost index funds may still play an important role in recreating your paycheck. The issue is not that index funds suddenly become “bad” investments at retirement. The issue is that relying entirely on market growth while taking regular withdrawals can expose a retiree to risks that were less threatening during the accumulation years.
A thoughtful retirement income strategy may include a coordinated mix of growth investments, income-producing assets, cash reserves, and a sustainable withdrawal plan. The right combination will depend on the retiree’s spending needs, risk tolerance, tax situation, other income sources, and expected retirement horizon.
Active Oversight Is Not a Promise of Protection
At Studdard Financial, we believe retirement portfolios deserve more than a generic allocation and a recommendation to wait out every market decline – especially for those that need the portfolio to recreate their paycheck in retirement. Active oversight can include reviewing market trends, company earnings, sector conditions, support and resistance levels, moving averages, and technical chart patterns when determining when risk may need to be reduced or when opportunities may warrant attention. We use technical and fundamental analysis to actively take small profits when the market is rising.
As a fiduciary, we use tools such as trailing stop-loss limits to help us define a downside exit point and try to protect gains in certain situations. They are not guarantees. A fast-moving market can cause a stop order to execute below its trigger price, and frequent trading can create taxes, transaction costs, and the risk of exiting before a rebound. Active management also requires discipline, a documented process, and ongoing attention rather than emotional reactions to headlines.
That trade-off deserves an honest conversation. The goal is not to predict every decline or avoid every loss. It is to build a retirement income strategy that recognizes withdrawals change the math. Our financial plans focus on recreating your paycheck while managing risk intentionally.
A fiduciary investment advisor should be willing to explain exactly how your investments are managed, how withdrawals will be funded during a downturn, and how the advisor is compensated. Those answers matter most before the next bear market, not after retirement assets have already been sold at a loss.
About Byron L. Studdard, CFP®
Byron L. Studdard is a CERTIFIED FINANCIAL PLANNER® professional and the founder of Studdard Financial – a fee-only fiduciary registered investment adviser serving clients from coast to coast from offices in Sarasota, FL and Memphis, TN. For more than thirty years, he has provided personalized investment advice, retirement planning guidance, social security maximization strategies, and intergenerational wealth-transfer support to clients seeking disciplined, trustworthy financial oversight. His writing has been featured on the websites of ABC News, Good Morning America, and Yahoo.
Important Disclosures:
All information provided is for educational purposes only and does not constitute investment, legal or tax advice; an offer to buy or sell any security or insurance product; or an endorsement of any third party or such third party’s views. The information contained herein has been obtained from sources we believe to be reliable but is not guaranteed to be accurate or complete. Studdard Financial, LLC does not offer tax or legal advice, but might refer clients to independent accounting, tax, or legal professionals.
Whenever there are referrals to other professional advisors, or references or hyperlinks to third-party content (including but not limited to tax and legal), this is intended to provide additional perspective and should not be construed as an endorsement of any services, products, guidance, individuals, or points of view. All examples are hypothetical and for illustrative purposes only. Please contact us for more complete information based on your personal circumstances and to obtain personal individual investment advice.
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