Retirement » Retirement Income

Protecting your retirement income from stock market market volatility

Imagine that you’re 60 years of age and you’ve recently retired. You have a small pension that’s supplemented by incomes from the Canada Pension Plan, Old Age Security and an investment portfolio. You’re not rich, but you’re able to live comfortably and worry free. All of those years of saving have paid off and you’re living the life you dreamed.

Then comes a big market drop like what happened in 2008 or what’s happening in 2022.  What if your $400,000 retirement savings suddenly dropped to $300,000 but you are still drawing $20,000 per year and now you’re forced to sell investments that are down in value.

I won’t bore you with the math. Suffice to say, that’s a problem. How can you protect your retirement income from this math?

Related article: Market drops hit retirees the hardest

Market fluctuations are your friend when you’re saving for retirement, but a dreaded enemy when you’re already retired. When you’re saving, market downturns are great opportunities to buy into a rising tide at reduced prices. The opposite is true when you’re taking money out of your investments.

In his excellent book, Your Retirement Income Blueprint, Winnipeg financial advisor Daryl Diamond writes about what some call the retirement risk zone. This is generally the five years immediately before and after retirement age. A big drop in the value of your investments during this period can be disastrous.

Related article: Be aware of the retirement risk zone

The accompanying chart shows an example of a Canadian balanced mutual fund that has averaged seven per cent. My example shows an initial investment of $100,000 and $7,000 annual income withdrawals. You may think that drawing seven per cent per year from an investment that returns seven per cent should be safe. Not so. It can put you at substantial risk of outliving your money.

YEAR Example 1 Example 2 Example 3
1 7.0% 9.9% -7.0%
2 7.0% 14.0% -4.0%
3 7.0% 13.0% 21.0%
4 7.0% 23.0% -1.0%
5 7.0% -4.0% 10.0%
6 7.0% 10.0% -4.0%
7 7.0% -1.0% 23.0%
8 7.0% 21.0% 13.0%
9 7.0% -4.0% 14.0%
10 7.0% -7.0% 9.9%
END VALUE $100,000 $112,528 $83,586


The chart shows three sequences of returns – one a consistent seven-per-cent return then two with widely fluctuating returns in opposite orders. It’s those widely unpredictable, varying returns that can crush your retirement if you’re not careful.

The problem occurs when you have a year of two of bad returns right off the bat. If you’re starting to draw income during or after a market correction, you could be in big trouble.

The last column shows the exact same seven-per-cent average return and the numbers are identical, but in reverse order with some of the losing years up front. In my example, not that you end up with 35 per cent less money than if you have solid years up front – a difference of $28,942. That’s huge.

Diamond’s book describes what he calls “the income-delivery process.” He calls it the cash wedge.

I used a variation of Diamond’s cash wedge as my clients approached retirement and it continued throughout their retirement. I would set up three baskets of money – one each for short-, medium- and long-term use. This is a strategy that can provide market growth while protecting their income from the ravages of market fluctuations.

Related article: Creating retirement income with buckets of money

My short-term basket was for money that clients need in the first three years or so. It went into a high-interest savings account where it’s safe and secure. This is where they drew immediate income.

The medium-term basket is for money that wouldn’t be needed for about three to six years. The goal here was conservative growth. We choose investments whose growth was more muted, and would rebound better after a market downturn.

The long-term money went into growth-oriented investments. If you had six years or more then you would have time to ride out volatility.

As Diamond writes, “…when you are drawing income from your portfolio, the order of investment returns has a significant impact on your assets…. When withdrawals are being made and you have negative investment returns in the early years, there is a very negative impact on the value of the income-producing asset. What you basically have when you are drawing out income and you experience negative investment returns is a double-drawdown effect.”

Related article: Variable returns can work against you in retirement

It’s not a leave-and-ignore strategy. You must always have money for immediate use that’s not going to fluctuate, so you need to replenish your short-term basket periodically. Protecting your retirement income from the stock market is critically important.


  1. Richard Ferguson

    A reasonably decent strategy.


  2. Claude Mayrand

    Protecting your retirement income from the stock market

    When I was 45, I was retired and drawing on my RRSP (lost my job, EI finished). I saw my retirement capital dropping.

    What I observed/learned is that the amount of capital one might have struggled to accumulate (saving is a misnomer) is nowhere near as important as how much income that capital generates.

    Creating cash became king. My focus started to change from relying on strangers to manage my capital, I looked for cash generating opportunities. At first I found some corporate bonds, namely CIBC; I collected 13% (yes, it was a while ago) for 12 years or so.

    Over time, the strategy has evolved into various forms of monthly distributions: dividends, interest, return of capital, capital gains.

    Recently for instance, in this down market, the Canadian bank dividends have gone up but the stock prices are down. The value of my portfolio has gone down, my monthly cash income is stable.

  3. Mary lummerding

    Old Age Security is available at age 65 not age 60. The Spouse allowance and Widowed Spouse allowance are available at age 60 but are income based.

  4. DivInvestor

    Yes, I agree with Claude. The conventional wisdom of withdrawing a percentage from your portfolio can have negative effects in down markets and it’s better to build other income streams. Our entire income is dividends. Over the last four years we have an average annual increase of dividends of 8.28%. No need to sell any shares.

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