The ups and downs of the market are not a bad thing in themselves, but if they are not understood they can wreak havoc on an investor’s portfolio. A young investor has the luxury of riding the market rollercoaster with the knowledge that historically, the overall market has always grown over time. Once retired, and investor does not have that luxury.
Once you retire your portfolio becomes the income generator for you and your family. You gradually withdraw assets from your account in order to pay for your everyday life and expenses. Unfortunately things like food, mortgages, and the gas bills need to be paid regardless of how your portfolio is performing at the moment. Because of this retirees are often forced to withdraw money from their plans at times of poor performance, essentially locking in those losses. As you can imagine this damages the portfolio and affects how long it will last.
Some would argue that the periods of good performance and poor performance would even out over time, but that is missing what should be a relatively obvious point. Such logic would suggest a 10% decline in a portfolio is made whole by a subsequent 10% gain, but simple math shows the real damage that such fluctuations can do to a portfolio. If a $100 portfolio loses 10% it is reduced to $90. From $90 a 10% gain only brings the portfolio back up to $99. Now imagine if your million-dollar portfolio dips 20% in a year in which you also have to make withdrawals to pay for household repairs, as well as all your usual bills. You would need substantially more than a 20% gain in the following year in order to make up the ground lost the year before.
The good news is there are things you can do. While it is theoretically possible to time your withdrawals to bull runs in the market, this is nearly statistically impossible to do with any consistency. Instead, portfolios can be designed to generate cash flow in addition to returns, allowing you to spend the portfolio income without selling off assets. Additionally money generated outside of the market like earned income, social security, income annuities, and cash value life insurance allow individuals to account for a large portion of their expenses without dipping into portfolio assets.