Market downturns are a normal part of investing.
For Australians in retirement, however, market falls can feel more confronting because income withdrawals are already underway.
Understanding how market declines affect retirement income, and how portfolios are structured to manage this risk, can help retirees remain informed and avoid reactive decisions during periods of volatility.
Why market downturns matter more in retirement
During working life, market falls are often viewed as temporary setbacks. Contributions continue, and time can help smooth out volatility.
In retirement, the situation is different. Withdrawals begin at the same time as market movements occur, which can amplify the impact of downturns.
This interaction between withdrawals and market returns is commonly referred to as sequence of returns risk.
Understanding sequence risk
Sequence risk occurs when negative investment returns happen early in retirement, at the same time as income withdrawals.
Because withdrawals reduce the portfolio balance, fewer assets remain invested to recover when markets rebound. Over time, this can permanently reduce the sustainability of retirement income.
Sequence risk is not about long-term average returns, it’s about when returns occur relative to withdrawals.
What is the retirement danger zone?
The first years after retirement are often the most sensitive period for sequence risk.
Many financial studies highlight the first five to ten years after retirement as a critical window, because:
- Withdrawals begin while balances are at their highest
- Market volatility can have an outsized impact
- Recovery time is shorter than during accumulation
This doesn’t mean retirees should avoid investing, but it does highlight the importance of portfolio structure during this phase.
Balancing growth and defence in retirement portfolios
Retirement portfolios typically aim to balance two competing needs:
- Providing sufficient growth to support long-term income
- Reducing volatility to help manage withdrawals during market downturns
Holding only growth assets may expose retirees to higher volatility, while holding only defensive assets may reduce long-term sustainability due to inflation.
A diversified mix of growth and defensive assets is often used to manage this balance.
How defensive assets can help during downturns for retirees
Defensive assets are included in retirement portfolios to help reduce overall volatility and provide stability when equity markets fall.
Examples of defensive assets include:
- Bonds, which may behave differently to shares during market stress
- Gold, which has historically been used as a diversifier in some portfolios
- Cash or cash-like assets for liquidity
These assets don’t eliminate losses, but they can help cushion the impact of equity market declines.
Why portfolio structure and diversification matters in retirement
Diversification plays a central role in managing retirement risk.
By spreading investments across different asset classes, sectors and regions, portfolios aim to reduce reliance on any single source of return.
In practice, this means that when some assets fall sharply, others may fall less or behave differently, helping smooth overall outcomes.
Why staying invested matters in retirement
One of the biggest risks during market downturns is emotional decision-making.
Selling investments after markets have already fallen can lock in losses and reduce the opportunity to benefit from future recoveries.
A portfolio designed with defensive assets and diversification may help retirees stay invested through downturns by reducing the severity of short-term fluctuations.
Staying invested does not mean ignoring risk, it means having a structure that allows withdrawals to continue without forcing asset sales at unfavourable times.
Income payments in retirement during periods of market volatility
In retirement, income payments typically continue regardless of market conditions.
This makes portfolio construction especially important, as assets must support both income needs and ongoing investment exposure.
Automated portfolio management and rebalancing help ensure that income payments are processed while the portfolio remains aligned with its intended risk profile.
Transparency over assets and asset valuation during market downturns
Clear visibility can play an important role in helping retirees remain confident during volatile periods.
Seeing how different parts of a portfolio are performing, rather than focusing only on headline market movements, can help provide context during downturns.
Transparency helps retirees understand:
- Where returns are coming from
- Avoid any confusion surrounding unlisted asset valuations
- How defensive assets are behaving
- How income payments are being funded
This clarity can reduce uncertainty during challenging market environments.
Market falls are expected in retirement: preparation matters
Market downturns are an expected part of long-term investing, including in retirement.
While they can’t be avoided, their impact can be managed through:
- Diversification across asset classes
- A balance of growth and defensive assets
- An awareness of sequence risk
- A structured approach to withdrawals
Being prepared for market volatility, rather than reacting to it, is a key part of managing retirement income over time.
Every Stockspot Pension client owns their ETFs directly, they’re not units in a pooled fund, so you can see exactly how your portfolio behaves in real time. Transparency builds trust when markets are uncertain.
Managing risk in retirement
Retirement investing is not about eliminating risk entirely, but about managing it in a way that supports income needs and long-term sustainability.
Understanding how portfolios behave during market downturns can help retirees approach volatility with greater confidence and clarity.
At Stockspot we designed the Amethyst 40/60 mix to help cushion some of the market volatility. A portfolio with 40 per cent growth and 60 per cent defensive assets absorbs shocks better than aggressive allocations. Bonds and gold provide ballast while shares deliver the growth needed to recover once markets stabilise.
