How to Manage the Deaccumulation and Withdrawal Phase of Retirement in an Economic Downturn

You’ve saved diligently, planned carefully, and can finally see retirement on the horizon. Then the market crashes.

Does this mean putting your dreams on hold? Not necessarily.

In this episode of Heart of Your Money, we dive into the often-overlooked “deaccumulation phase” – how to spend your retirement savings wisely even when markets work against you.

We’ll explore why the timing of market downturns can devastate unprepared retirees, share a real-world success story of a couple who retired during an 8% market decline, and reveal strategies that go beyond the oversimplified “4% rule.”

Show Notes: How to Manage the Deaccumulation and Withdrawal Phase of Retirement in an Economic Downturn

Hey there. Welcome back to the Heart of Your Money. This is episode 135.

So you’ve saved, you’ve planned, you’re ready to retire, but then the market crashes. There is a downturn. Now what? Do you delay your dream, change your plans? Well, the good news is if you’ve planned right, you don’t need to. So today I want to talk about one of the most overlooked but most important parts of retirement.

And this is what we call the deaccumulation phase. It’s how to spend your money wisely when the markets are working against you, and it’s where great retirement plans either succeed or fall apart. So what is deaccumulation? Well, this is just a fancy word for spending down your retirement savings, but it’s not as simple as just drawing a monthly amount because the order and timing of your returns when the market goes up or down matters a lot more than people realize.

You know about dollar cost averaging when you’re saving. And so we share that all the time. When you’re in the accumulation stage, you buy a little bit over time and dips in the market help you get more bang for your buck. So if you’re doing monthly or biweekly, you’re able to scoop up those pricings over the course of a year. And average is that you’ll do better, but in retirement, you’re doing the opposite. You’re selling. If the market drops and you still need to withdraw the same amount, you’re selling more shares at lower prices, and it can shrink those retirement savings faster than expected. We call this sequence of returns risk.

I know it’s a mouthful, but what it’s meaning is the danger that poor investment returns early in retirement can hurt your savings. And this is something we as planners manage within your investments and we plan for it. So it doesn’t come as a surprise when there’s market downturn.

So here’s a simple example I’ll share with you. Bob and Jim, two names there. So we’ve got, they both have $1 million when they retire and both over time when looking back they had an average return of 4% over 30 years, but Bob experiences poor returns in the first few years. Jim, when he retires, he gets those strong returns early on. So they’re both selling ’cause they’re taking money out of this $1 million portfolio.

Fast forward—Bob, who had the poor returns in the beginning years, he runs out of money by year 26. Jim, he has funds left over after 30 years because he had those strong returns early on when he retired. Same average return over time, completely different outcomes. That’s how dangerous the sequence of returns can be.

So this is why having someone know what they’re doing and planning in advance and being smart takes all of this into account with your retirement planning and choosing what bucket to turn on the tap from, and even more important, what type of investments to put inside your bucket because of this risk we call sequence of returns.

So I’ll share with you a couple who retired and it was back when the market was down about 8%. So think of the market being the S&P 500, the US stock market, or TSX being the Canadian stock market. It was down around 8% at the same time. So they’re retiring right as there is an 8% decline in the market.

We had planned for this. It wasn’t a matter of if, but when a downturn came and with proper planning, we thought, okay, well what happens if there is a downturn during this time of retirement? So retirement comes and there was a cash retirement allowance for this couple when they retired. And we’d been working together for a while, planned in advance.

So we had a couple of savings buckets already in there, laddered in with some high interest cash savings because we know cash is queen. And there is a fine line of having too much. But we had done the right math and we had. They had their emergency and their cash savings buckets in there.

‘Cause we were well diversified, they retired with a defined contribution plan. So they had investments in this pension and we had a defense plan we had talked about. Part of the planning was, okay, if the market hits the fan and there is a downturn, can you still retire? Where are we gonna get your income from?

Yes, we knew we used the retiring allowance cash that they had, that we knew in advance that was coming. We had done our homework. We knew the vacation payout. In fact, this couple, it was funny, they were kind of waiting to be let go because of a severance too. And so then there was, okay, well if there is a severance payout with the years of income, here’s what we do.

And so we went actually and went through all the scenarios and so we knew there was a retiring allowance, cash coming. They had done their homework and we’d planned for it in the last three, four months. Vacation payout. We talked about the right timing of when to retire. We’d gone through that and we’d gone through when they’re getting their vacation days, and we’d gone through should they take them or get paid out, and there was some personal preference there and circumstance.

So they had a vacation payout and they had that cash reserved I talk about. And so all in all, we had enough to cover 24 months of retirement income with these cash places. We didn’t have to touch investments. Investments were able to recover through the downturn without being cashed in. We were able to avoid the sequence of returns risk by not selling in low price period with their investments.

This gave their equities time to recover. And so we know 12, 18 months, 24 months, and everything comes back. And with the proper planning and investment choices, we had protected them from selling low. They stayed on track with no stress because we planned for the bumps. With proper planning, you can retire in a downturn market.

Now there’s a few common solutions out there you might hear in the news or social media about retirement strategies. The big one is that 4% rule. Everybody’s heard of this 4% rule. I’m just gonna take what I have in my investment, times it by 4%, and that’s what I’m gonna take out every year.

Another one is the automatic rebalancing. So shifting your asset allocation to a schedule. And the other one is just literally sitting on your cash. It’s under your mattress, it’s in the bank, and it’s true, I’ve seen it where literally hundreds and hundreds of thousands of dollars in the bank because of the scare of the market.

So each one of those are things that we’ve heard about, especially that 4% rule. They make you feel in control because you have a plan. 4%. Here we go. Cash. I feel good. I feel in control. Automatic rebalancing. Okay, this auto thing that’s happening and shifting. Asset allocation, I’ve done something. I feel like I’m good, in control.

They’re not always the best way to manage risk. So 4% rule can leave you underspending or worse, broke. That is not applicable to everybody across the board. And I just talked about the sequence of returns risk, meaning that if you just did that without thinking, and no matter what, you took your pot and took 4% out, you’re still selling in a low period.

You haven’t strategized and diversified, you name it. Not the best thing to fall back onto as a default. Only cash buckets. We know that’s not always the best. You’re gonna feel safe, but you’re gonna lose out on inflation. The cost of things go up every single year and by sitting on your cash mattress, you’re losing every single year as things get more and more expensive.

Your dollars worth less. Automatic rebalancing. Well, that schedule, that may cut your growth too soon. Right? Your equities and dividend paying stocks, these are strategies that—it’s now risky to not be invested. So rebalancing and taking out the risk too soon and just throwing yourself in bonds.

Bonds are not a textbook thing either. They need some watching. So these, again, they make you feel in control. They’re just not always the best way to manage risk. You need more thinking and planning strategy.

Then what do I do? Stay invested in growth. Yes, stocks are volatile, but over long period they’ve beaten inflation and recovered from crashes.

So it’s about planning the, when you know what hits the fan, what do we do, what’s your defense plan in there? And that’s that strategic planning to avoid those sequence risks. Staying invested in a well diversified portfolio gives you the best chance to keep up. Use some flexible spending here.

Ability to be flexible. Adjust your spending means ensuring a good cash emergency savings account that you can use a bit. And turn down investments in a downturn. Spend a little less after, during a bad market year. Spend a bit more when things are good, and so making sure you’re diversified with those buckets.

It is a smoother, more realistic way to live off your money. And honestly, it gives you freedom. You’re not locked in, you adapt just like you did in your working years. So the key takeaway is adapting. The first few years of retirement are crucial to having good, solid advice and planning. Every retirement plan needs a defense line for when you know what hits the fan.

Where do we take our cash from so that I can still get paid in retirement? So you can retire in a downturn with a solid growth portfolio, a short term cash buffer that planned intentionally savings that I talk about, and a flexible approach to spending. So saving was only half the work. Spending it right now. That’s the other half—is spending it wisely, turning on the tap correctly. That’s the real retirement strategy there that needs to be planned out. If you’re thinking about retirement or already there and want to build a smart stress tested deaccumulation plan, let’s talk. Gimme a shout.

Thanks for listening and we’ll talk soon.