For many investors, there’s a silver lining to a market downturn. It’s when investment managers purchase stocks at value prices so you could enjoy higher returns when the market rebounds. But what if you’re close to retirement or already retired?

Just before retirement, a plummeting market can severely reduce a nest egg’s value. There may not be time for markets to fully recover, and retirement may need to be postponed. If a market downturn occurs just after you retire, you face a different crisis: your nest egg loses value at the same time you’re withdrawing retirement income. You may need to modify your retirement lifestyle to ensure you don’t outlive your savings.

These potential dangers are why this period has been called the retirement risk zone, which begins about five years or longer before retirement and lasts about five years or longer after the retirement date.

Managing the risk

Not long ago, safeguarding your portfolio before and after retirement was quite straightforward. Simply decrease your equity allocation as retirement approaches, increase fixed income, and maintain the conservative mix throughout retirement. But in many cases, this strategy alone is no longer enough. Today’s low interest rates don’t allow for enough income, and increasing longevity requires more growth to fund a longer retirement.

Fortunately, there are several financial strategies to protect against the risk of a market downturn during these critical years. One solution involves creating a pool of low-risk fixed-income investments designed to provide several years of retirement income. A separate portfolio of higher-yield fixed income and equities provides longer-term income and growth – and is used to replenish the retirement income pool. This solution is built to withstand market dips, securing annual income while funding a long retirement.

Other solutions begin upon retirement, such as basing annual retirement income on a fixed percentage of portfolio assets, which takes less of your capital when markets are down.

Determining your solution   

These solutions and others are available to you, and often the answer is to combine two or more solutions. Your solution should be based on numerous factors, including your retirement income sources, whether you’re supporting a spouse, the size of liquid assets, your risk tolerance and estate plans.

If you’re approaching the retirement risk zone, get in touch with your advisor to explore the solutions that will suit your situation.