Designing a retirement plan for real markets

Retirement has a strange habit of turning otherwise sensible people into short-term thinkers.

You can spend 30 or 40 years saving steadily, investing patiently, and ignoring the noise.  Then the payslip stops, and the questions begin:  What if markets fall now?  What if I have to sell at the bottom?  These are rational questions.  Retirement changes one crucial rule:  you stop accumulating assets and start drawing from them.  The order in which returns arrive suddenly matters far more.

That’s what people mean by sequence of returns risk – the danger that weak markets early in retirement permanently damage a portfolio while income is still being withdrawn.  It’s the financial equivalent of starting a long hike by spraining your ankle in the first kilometer.

Most retirement plans are built for spreadsheet assumptions:  tidy average returns and manageable inflation.  Real life rarely behaves that way.

Timing becomes everything

When you’re still working, a market decline is unpleasant but not fatal.  In fact, it can be helpful in a perverse way:  your monthly contributions buy more units when prices are down.  You’re effectively accumulating at a discount.  Time, and cashflow, cushion you.

In retirement, you no longer have that cushion.

You’re withdrawing.  And when the market falls, you can’t simply ‘wait it out’ if you still need money to live.  You still withdraw income, forcing asset sales at depressed prices
and reducing the capital available for recovery.

This quickly becomes self-reinforcing.  A drawdown that felt perfectly manageable in good markets suddenly starts to feel aggressive.

 

Many retirees then increase drawdown percentages to maintain the same rand income.  Bad markets early in retirement are far more damaging than bad markets later on.

South Africa adds its own twist

South Africans face the same risk, but our retirement structures can amplify it.  The living annuity is a good example.  It offers flexibility, investment choice, and estate benefits.  It’s also a structure where you carry the investment and (crucially) the sequencing risk yourself.

Living annuity regulations allow drawdowns between 2.5% and 17.5% of the portfolio each year.  The uncomfortable truth is that people can legally draw down at levels that are mathematically unsustainable unless markets are consistently (and usually) generous.

What makes this tricky is that living annuities are often incorrectly treated as if they were old-school ‘retirement income annuities’ derived from the defined benefit retirement funds of yester-year, rather than what they actually are: your own income strategy that must survive several decades of uncertainty.  If you approach it as a product choice, you focus on features.  If you approach it as a system, you focus on resilience.

How do you know if you’re exposed?

You don’t need an actuarial model to identify sequence risk.  If your plan requires you to draw a high percentage of your invested assets just to cover a normal lifestyle – you’re exposed.  If your income depends on selling growth assets every month regardless of what markets are doing – you’re exposed.  If you have no meaningful cash buffer and your approach to a downturn is ‘we’ll see what happens’ – you’re exposed.

There’s also a quieter signal:  if you find yourself checking portfolio values far more often than you used to, it’s usually not because you suddenly became curious about markets.  It’s because the withdrawal has made the volatility feel personal.

The goal isn’t to outsmart the market

Let’s get this out of the way:  you cannot remove uncertainty from retirement.

The goal is not to predict the next crash, or to find the perfect fund, or to time the cycle.  The goal is simpler and more realistic: design your income strategy so that markets don’t force you into destructive behaviour.

In other words, you want to reduce the chance that you become a forced seller when prices are depressed.

A buffer is not boring – it’s a shock absorber

The most practical defence against sequence risk is simple:  keep a dedicated income buffer.

Call it a cash reserve or liquidity sleeve.  The label doesn’t matter.  The function does.  Its job is to fund income for a period without requiring you to sell long-term assets at a bad time.

A buffer gives markets time to recover without forcing asset sales.  It also creates emotional breathing room, which helps reduce panic-driven decisions.

Buffer size depends on income needs, drawdown levels, and tolerance for volatility.  Many retirees hold one to two years of income requirements.  The point is to avoid being forced to sell at precisely the wrong time rather than hide from markets forever.

The ‘bucket’ idea can work – if you don’t turn it into theatre

Some people like the idea of dividing retirement assets into time-based segments: money for now, money for soon, money for later.  It’s often called a bucket strategy.  Used sensibly, it’s simply a way of making the earlier principle explicit.  The ‘now’ bucket funds income.  The ‘soon’ bucket replenishes it.  The ‘later’ bucket takes long-term growth risk to outpace inflation and replenish the earlier buckets over time. Weak markets draw income from the ‘now’ bucket.  Strong markets replenish it from growth assets.  If the bucket strategy becomes a marketing story rather than a rules-based system, it doesn’t help.  The real power comes from having a clear approach to replenishing and rebalancing – and sticking to it.

Spending flexibility is a strategy, not a vague promise

Retirees often say,  ‘We can always cut back if markets fall.’   That’s true in theory.  In practice, when markets fall and fear rises, ‘cut back’ becomes emotionally difficult.  The better approach is to decide in advance what ‘cutting back’ actually means in a realistic way.

A useful retirement plan distinguishes between core spending and discretionary spending.  Core spending covers essentials: housing, food, healthcare, insurance, and transport.  Discretionary spending is where life happens:  travel, upgrades, generous family support, and the impulse to renovate the kitchen.

Discretionary spending should absorb market shocks before essential spending does.  If the portfolio drops meaningfully, discretionary spending is trimmed for a period.  If the portfolio recovers, spending can be restored gradually.

The key is that the adjustments are planned, not panicked.

Drawdown creep is the quiet killer

Drawdown drift often starts innocently.  Markets rise, income increases, inflation bites, spending rises further, and then weak markets arrive.  Retirees often respond by increasing drawdown percentages to preserve lifestyle levels.  That’s when sequence risk stops being theoretical.   

If your plan requires rising withdrawals during weak markets, the structure is too tight.

Consider buying certainty for the essentials

South Africans tend to like control in retirement.  The living annuity feels like control.  A guaranteed life annuity can feel restrictive.  But consider a different framing:  a guaranteed income component is not about surrendering.  It’s about insuring the part of
your lifestyle that must not fail.

Partial annuitisation can work well:  secure essential expenses with guaranteed income, while allowing investment assets to pursue long-term growth.

Retirement is full of trade-offs.  Guarantees reduce flexibility and estate potential.  The mistake is believing you can maximise flexibility, certainty, income and legacy simultaneously.

Fees, tax friction, and concentration:  The accelerants you don’t notice until it’s too late

Sequence risk worsens when portfolios face additional headwinds.  High fees compound against shrinking portfolios.  Tax inefficiency reduces usable income.  Concentration risk increases the chance that a bad year becomes bad years.  Retirement success is often built by reducing predictable drags rather than chasing exciting wins.

A simple stress test for real people

If you want to know whether your plan is resilient, ask three blunt questions.

1. If markets fall 20%, where does your income come from?
2. If inflation stays high for five years, what changes?
3. If you live longer than expected, what breaks first?

Good plans need honest answers more than perfect ones.

Building a robust retirement system

Retirement works best when it’s treated as a system rather than a product.

The system usually includes:

• a clear income floor,
• sensible drawdowns,
• liquidity reserves,
• diversified assets,
• spending flexibility,
• and regular review.

You don’t need all of these in equal measure.  You need enough of them for the plan to survive ordinary market volatility.

The bottom line

Sequence of returns risk is the retirement risk that hides in plain sight.  It rarely appears in performance reports.  It arrives as an unlucky combination:  withdrawals plus early market declines.  The way around it is design rather than prediction.

Buffers, sensible drawdowns, structured spending flexibility, and guaranteed essential income all reduce the risk that early market weakness permanently damages retirement outcomes.

A professionally structured, regularly reviewed financial plan should incorporate sequence risk, drawdown sustainability, retirement products, and portfolio resilience.  Markets will remain volatile.

The objective is to structure a plan that can survive uncertainty, without emotionally driven decisions.