The Devastating Impact of Loss on Risk-Bearing Investment Portfolios for Retirees
 

For retirees who rely on their nest egg to fund their living expenses, the impact of market losses can be catastrophic.

The primary goal in retirement is to generate predictable, stable income, and many retirees have been conditioned to rely on traditional portfolios—often a mix of stocks and bonds—believing that their wealth will grow enough to sustain them over the long term.

However, these risk-bearing portfolios come with a hidden danger: loss. And for retirees, loss isn’t just an inconvenience—it can be devastating.

 

The True Impact of Market Loss
 

Let’s start with a simple example: a $1 million portfolio. How much does a 5%, 10%, or even 50% market decline cost a retiree?
 

• -5% Loss: A 5% loss on a $1 million portfolio equals $50,000. While this loss might be painful, the portfolio would still have $950,000 left.
   

• -10% Loss: A 10% loss on $1 million equals $100,000. After the loss, the portfolio would be worth $900,000.
   

• -20% Loss: A 20% loss equates to $200,000, leaving the portfolio with $800,000.
   

• -35% Loss: A 35% loss, like the one seen in calendar year 2008, means $350,000 has evaporated. The portfolio’s value is now $650,000.
   

• -50% Loss: A 50% loss—such as the one that occurred in the global financial crisis (Oct 2007 - March 2009)—equals $500,000. The portfolio is now worth only $500,000.
   

It’s important to note that these losses aren’t hypothetical, but they do not even include the further decline that would be realized if systematic income withdrawal were coming out at the same time.

The total peak-to-trough drawdown during the 2008 market crash was a staggering -51% from October 2007 to March 2009—not the -35% return for the calendar year of 2008.

This is the reality retirees must contend with: the market doesn’t simply drop in a predictable way—it can take a sudden and significant turn for the worse, and the resulting losses can be massive.

 

How Long Does It Take to Recover?
 

What most investors fail to realize is that losses don’t work in reverse the same way gains do. For example, if your portfolio loses 50%, you would need a 100% gain just to break even. Let’s say your portfolio drops from $1 million to $500,000. To get back to $1 million, you would need to make another $500,000—an entire 100% gain on your remaining balance.
 

If your portfolio loses -35%, it requires a 53% gain to recover. A loss of $350,000 on your $1 million portfolio means you need to grow that $650,000 by 53%—to $1 million—just to get back to where you were.
 

This can take years. And in retirement, years are a luxury you don’t have.

Time doesn’t work in your favor when you need the funds to pay for daily expenses. This is where the real danger lies for retirees who rely on risk-bearing portfolios: they don’t have the option to "sit tight" and wait for the market to recover, especially if they are relying on systematic withdrawals to fund their living expenses.

 

Why Systematic Withdrawals During A Market Downturn Is A Mathematical Death Spiral
 

When you are drawing income from a risk-bearing portfolio, losses become even more devastating. Let’s say you’re taking a 4% withdrawal from your $1 million portfolio, which is $40,000 a year. If the market declines by 20% in the first year, your portfolio is now worth $800,000. But you still need that $40,000 income, so you take another withdrawal. Now, you're withdrawing a larger percentage of a smaller portfolio, making it even harder to recover.
 

This sets up a mathematical death spiral: each loss makes it harder to recover, and each withdrawal compounds the issue.

If the market keeps declining, you risk running out of money before you ever see a rebound. Withdrawing funds from a shrinking portfolio is a losing proposition for anyone relying on their investments for income in retirement.

 

Why Losses Are So Much More Impactful Than Gains
 

The crucial point here is that losses in a retirement portfolio are much more harmful than gains. After a loss, you don’t just need to make up for the dollar amount lost—you need a far larger percentage gain to recover. The damage is done, and the portfolio may never fully recover. As a retiree, you simply don’t have the luxury of waiting out the market for several years to get back to even. The impact of a significant loss during the income phase of retirement can leave you with fewer assets to work with, and much less time to recoup those losses.

 

The Solution: A Laddered Lifetime Income Annuity Portfolio
 

Given the inherent risks of relying on risk-bearing investments for retirement income, a better solution for many retirees is to allocate a portion of their portfolio to lifetime income annuities. These annuities are a non-risk-bearing asset that guarantees a stream of income for life, no matter what happens in the market.

By shifting a portion of your portfolio into a laddered annuity strategy, you can:
 

1. Guarantee your income: A laddered annuity portfolio allows you to lock in a guaranteed income stream for life, which takes the market risk out of the equation for your essential needs. No matter what happens in the market, your basic income needs are covered.
    

2. Eliminate sequence of returns risk: With a laddered annuity, you no longer have to worry about how the market performs during the early years of your retirement. The income from your annuities is guaranteed, which protects you from the sequence of returns risk—the danger that poor market returns in the early years of retirement will deplete your portfolio.
    

3. Free up remaining capital for growth: The remainder of your portfolio, which is not needed for basic income, can be kept invested in stocks or bonds for long-term growth. The portion of your portfolio that is not exposed to risk-bearing investments can continue to compound and grow, helping you outpace inflation and potentially build wealth for future generations.
   
    

Conclusion: Don’t Rely on Risk-Bearing Portfolios for Stable Retirement Income
 

When it comes to retirement, income should come from non-risk assets.

The market can—and will—experience downturns, and the impact of those losses can be catastrophic for retirees who rely on their portfolios for income. The 4% withdrawal rule and risk-bearing portfolios may have worked in the past, but they don’t offer the stability or predictability that retirees need in today’s uncertain financial environment.
 

By using a laddered lifetime income annuity strategy, you can protect yourself from the dangers of market losses, guarantee your essential income needs for life, and still have the potential for growth with the remaining assets in your portfolio. Don’t leave your retirement to chance—use the right tools for the right job and ensure your financial security for years to come.