US retirees with $1M at 60 can easily have $0 by 71. A volatile market can shatter savings — try this simple solution

If $1.26 million was the fortune teller’s answer to retirement security, then the prediction may need revising.

Even Northwestern Mutual’s seven-figure starting point can seem like an illusion as some retirees still face the risk of depleting their savings by their 70s (1). They could also hit $0 years before their retirement ends, trapping them in an unwelcome final chapter.

Add to that the challenge of getting closer to that number is more of a crapshoot in your mid-60s. And the risk has nothing to do with discipline, spending habits or even debt. Instead, the real culprit is simply bad timing.

Here’s how you can avoid the risk of losing your robust nest egg.

Experiencing a major market correction can have a devastating and long-lasting effect on your retirement savings. According to the MIT Sloan School of Management, this is known as the sequence of return risk (2).

Consider the example of Ian, a 60-year-old with $1 million set up in investments. Ian’s assets are in stocks, and he plans to withdraw $60,000 a year. But his plans are about to be hampered by a severe economic downturn in his first two years.

Say the market drops 35% in the first year and another 25% in the second year. By withdrawing $60,000 in both years, Ian has overdrawn his savings. He is effectively selling stocks while they’re selling low. By the end of the second year, he is left with just $413,250 — less than half his initial wealth.

The market may recover to deliver a 7% to 8% annual return for the rest of Ian’s retirement, but he still ends up with $0 by age 71. His portfolio can’t sustain the $60,000 per year withdrawals after the first blow.

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In retirement, the timing of market corrections matters far more than their size. A sharp decline is painful. But when it happens early in retirement, it can cause permanent damage.

It is more manageable later in retirement. If Ian experienced 35% and 25% drawdowns in his 70s, rather than in his late 60s, his portfolio would have benefited from several additional years of compound growth. Those earlier gains would have created a larger capital base, helping absorb part of the losses without immediately threatening his income.

Additionally, years of positive returns before a major downturn allow withdrawals to be funded from growth rather than principal. Instead of selling assets at lower values, Ian would be drawing from a portfolio that had grown. This limits the need to sell investments at inopportune times.

Simply put, the sequence of return risk is greater earlier on in retirement.

Because the sequence of return risk is highest earlier on in retirement, Northwestern Mutual suggests the simple solution of creating a cash buffer (3).

If Ian sets aside $120,000 in safe high-interest accounts or bonds to cover expenses during market downturns, he won’t be compelled to withdraw from a battered portfolio. This cash buffer can cover expenses and give Ian’s portfolio room to recover.

Another way to mitigate risk is to diversify the portfolio across multiple assets. For instance, a mix of fixed income, international stocks and real estate could soften the blow from a dip in any specific market. If the stock market drops 35%, theoretically, your portfolio should drop by less than 35% because some of the investments may be in bonds, gold and real estate instead.

However, these measures can’t eliminate all of the sequence of return risks. At its core, this risk is about bad timing, and you simply can’t predict how any market will perform in the first few years of your retirement.

By creating a cash buffer and diversifying your portfolio across multiple asset classes, you can minimize the risk. The right strategy coupled with the right circumstances can extend your portfolio’s life by 10-15 years, which can be a fortunate game-changer for your retirement plans.

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Northwestern Mutual (1, 3); MIT Management Sloan School (2).

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.