Everybody loves a good dip-buying opportunity unless you’re the one looking to sell — at least, that’s what retirees with beefy nest eggs are finding out the hard way. With recession worries gripping the economy, the S&P 500 fell into correction territory this past week. And for America’s retirees, how long the current market downturn lasts could affect just how much retirement they can afford.

Time is money: In an ideal world, a retiree’s portfolio would see enough yearly returns or dividends to grow faster than its beneficiary could withdraw. Unfortunately, this is not the case for many Americans — especially with the market falling. Many baby boomers approaching retirement (or in their early aughts) are at risk of suffering from what Beacon Hill’s Tomas Geoghegan calls “one of the biggest but most underappreciated risks in retirement.” It’s called “sequence of return risk,” and it affects retirees who might be forced to sell to cover their current expenses — potentially shortening the longevity of their retirement nest egg.

• In essence, retirees’ need to sell assets and withdraw cash while markets are down can shorten the horizon of their retirement portfolio — even to the extent that a rebound can’t help fully recover the portfolio.
• Bloomberg warns that longer downturns could create surprise shortfalls — especially for less-capitalized retirees — which could blindside spendthrift baby boomers and exacerbate the economic doom and gloom.

Collateral Damage (Emphasis on Collateral)

Needing to sell assets during the current downturn could be costly in the long run — not just because you’re selling stocks for less than they were worth three weeks ago, but because you’ll physically own fewer shares than you did before when the bounce comes.

• For the sequence of return risk to become existential, markets would have to decline for a longer period. Thankfully, Morningstar’s Amy Arnott says back-to-back years of declines have only happened four times in the last 100 years.
• Further, this risk mostly affects those with heavy equity concentrations and those “in the years leading up to retirement and in the first five years after leading the workforce.”

Cash first: Many US rich have stayed equities-rich as a result of banner performances on Wall Street in recent years, but the recent downturn underscores the importance of gradually taking chips off the table ahead of retirement — making a stock-heavy portfolio into a safer portfolio made up of bonds and cash ahead of a planned exodus from industry. From there, the comfort of more stable assets could help soon-to-be-retirees strike a balance between responsibility and FOMO — holding onto your gains while maintaining some potential growth to the upside.