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Why Managing Volatility is Even More Critical for Retirees

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When saving and investing over long periods of time, the sequence of returns makes no difference—ending wealth reflects the long-term average of lifetime returns.

When saving and investing for retirement, the returns experienced just prior to, during and just after the transition into retirement are particularly important because a retiree is shifting from positive cash flows (savings) to negative ones (spending). During these years, market conditions can have a significant effect on the viability of a retirement plan and the value of the estate that will be passed on.

A key risk that retirees potentially face is the risk of experiencing poor market returns early in retirement, when wealth is typically at its peak. At the same time, strong market performance during this period can act as a tailwind, making retirement funding much easier.

For this reason, managing volatility early in retirement is critically important. This can be done through diversification strategies, as well as through investment solutions that provide some downside protection. As seen from the chart, negative returns early in retirement can deliver lasting change to a portfolio when compared with a portfolio that suffers negative returns late in retirement – even when the average return over the entire span of retirement is the same for both portfolios.


Source: J.P. Morgan Asset Management. The original Retirement Insights paper is titled "Timing retirement – A guide to determining when, and how, to retire" and can be found on J.P. Morgan Asset Management's website.