Market Volatility: Protecting Your Retirement in Uncertain Times

Markets go up. Markets go down. That's not news.

What matters is whether your retirement plan can survive—and even thrive—regardless of what markets do in the years immediately before and after you retire.

For those within 10 years of retirement (or already retired), market volatility isn't just uncomfortable. It's potentially devastating.

Why Volatility Matters More Now Than Ever

The traditional advice—"stay the course" and "don't panic sell"—assumes you have time to recover. But what if you don't?

The Sequence of Returns Risk

Two retirees. Same average returns. Dramatically different outcomes.

Scenario A: Good returns first

Year	Return	$1M Portfolio
1	+25%	$1,190,000
2	+15%	$1,318,500
3	-10%	$1,126,650
4	-20%	$851,320
5	+10%	$886,452

Ending balance after $60K/year withdrawals: $886,452

Scenario B: Bad returns first

Year	Return	$1M Portfolio
1	-20%	$740,000
2	-10%	$606,000
3	+15%	$636,900
4	+25%	$736,125
5	+10%	$749,738

Ending balance after $60K/year withdrawals: $749,738

Same average return. $137,000 difference. Just from timing.

This is sequence of returns risk—and it can destroy retirement plans.

The 2022 Wake-Up Call

Remember 2022? Both stocks and bonds fell simultaneously:

• S&P 500: -18.1%
• Bloomberg U.S. Aggregate Bond Index: -13.0%
• Traditional 60/40 portfolio: ~-16%

For retirees who needed to withdraw funds, this wasn't a "paper loss." It was permanent capital destruction at the worst possible time.

The lesson: Diversification between stocks and bonds doesn't always protect you. When correlations spike during crises, everything can fall together.

Traditional Protection Strategies (And Their Limitations)

Strategy 1: Reduce Stock Allocation

The theory: Less equity exposure = less volatility

The problem: Lower expected returns mean you need more savings, and you still face bond market risk (as 2022 proved).

The math:

• $2M portfolio at 7% grows to $3.9M in 10 years
• $2M portfolio at 4% grows to $2.96M in 10 years
• Difference: $940,000

Strategy 2: Cash Buckets

The theory: Keep 2-3 years of expenses in cash; don't sell stocks during downturns

The problem: Cash earns nothing while waiting. Opportunity cost over 10+ years is substantial.

The math:

• $180,000 in cash (3 years of $60K expenses)
• If invested at 7% instead: $354,000 after 10 years
• Opportunity cost: $174,000

Strategy 3: Annuities

The theory: Transfer risk to insurance company; guaranteed income

The problem: Surrender charges, fees, and loss of control. Often inflexible and expensive.

Strategy 4: Dividend Stocks

The theory: Live on dividends without selling shares

The problem: Dividends can be cut during downturns (2020, 2008). Not truly protected.

A Different Approach: Floor and Upside

What if you could capture market upside while eliminating downside risk?

This is the concept behind indexed strategies with floors:

Market Performance	Your Result
Market up 15%	You earn 10-12% (capped)
Market up 5%	You earn 5%
Market flat	You earn 0%
Market down 15%	You earn 0% (floor)
Market down 30%	You earn 0% (floor)

No negative years. Ever.

You give up some upside (the cap) in exchange for complete downside protection (the floor).

Over a 20-year retirement, eliminating negative years can actually result in higher ending balances than full market exposure—despite the cap.

How is this possible?

Because avoiding losses is more valuable than capturing all the gains. A 50% loss requires a 100% gain just to break even. If you never have the 50% loss, you don't need the heroic recovery.

Indexed Universal Life: Protection + Growth + Tax Benefits

Indexed Universal Life (IUL) insurance combines several powerful features:

1. Downside Protection

• Floor of 0-1% (you never lose money to market declines)
• Principal protection guaranteed by insurance company reserves

2. Growth Potential

• Credited interest tied to index performance (S&P 500, etc.)
• Caps typically 8-12% depending on product and environment
• No direct market investment—just index-linked crediting

3. Tax Advantages

• Tax-deferred growth (no annual taxation of gains)
• Tax-free distributions via policy loans
• Tax-free death benefit to beneficiaries

4. No Contribution Limits

• Unlike 401(k)s and IRAs, no annual caps
• Ideal for high earners who've maxed retirement accounts

Learn more about Indexed Universal Life →

Real-World Comparison: IUL vs. 401(k)

Let's compare $50,000/year invested over 20 years:

Traditional 401(k) in Stock Market

Assumptions:

• Average 8% return with typical volatility
• Two significant downturns (typical for 20-year period)
• 22% effective tax rate on withdrawals

Metric	401(k)
Total contributions	$1,000,000
Ending balance (avg)	$2,450,000
After-tax value	$1,911,000
Worst-case balance*	$1,680,000

*With poorly timed downturns near retirement

Indexed Universal Life

Assumptions:

• 7% average credited return (after caps)
• Zero negative years
• Tax-free distributions

Metric	IUL
Total premiums	$1,000,000
Cash value at year 20	$2,100,000
Tax-free access	$2,100,000
Worst-case balance	$2,100,000

Key insight: The IUL's lower average return is offset by:

1. No negative years (sequence risk eliminated)
2. Tax-free distributions (no 22% haircut)
3. Death benefit protection (additional value)

When IUL Makes Sense

IUL isn't right for everyone. It works best when:

You're a good candidate if:

• Within 15 years of retirement
• Already maxing retirement accounts
• In a high tax bracket (25%+)
• Concerned about market volatility
• Want tax-free income in retirement
• Need life insurance anyway

You might look elsewhere if:

• Just starting to save (maximize 401(k) match first)
• Low tax bracket now and in retirement
• Very short time horizon (under 10 years)
• Need maximum liquidity

Building a Volatility-Proof Retirement

The goal isn't avoiding volatility entirely—it's ensuring volatility doesn't destroy your retirement.

The Three-Bucket Approach (Enhanced)

Bucket 1: Protected Growth (IUL)

• 30-40% of retirement assets
• Zero downside risk
• Tax-free distributions
• Provides retirement income floor

Bucket 2: Growth Assets (Stocks/Funds)

• 40-50% of retirement assets
• Full market participation
• Accepts volatility for higher expected returns
• Draw last; allow maximum growth time

Bucket 3: Stability (Bonds/Cash)

• 10-20% of retirement assets
• Short-term needs and opportunities
• Rebalancing source
• Emergency buffer

Implementation Timeline

10+ Years from Retirement:

• Begin building IUL cash value
• Maximize tax-deferred accounts
• Accept growth-oriented volatility

5-10 Years from Retirement:

• Accelerate IUL funding
• Begin reducing equity volatility
• Model income scenarios

At Retirement:

• IUL provides protected income floor
• Draw from taxable accounts first (tax efficiency)
• Let tax-deferred accounts continue growing

Throughout Retirement:

• Coordinate withdrawals for tax optimization
• Use IUL loans to manage tax brackets
• Maintain flexibility for opportunities

Action Steps

Assess Your Volatility Exposure

1. Calculate sequence of returns impact on your portfolio
2. Model worst-case scenarios (what if 2008 happens your first year of retirement?)
3. Identify your true risk tolerance (not just what you say, but how you'd actually react)

Explore Protection Options

1. Review IUL illustrations from multiple carriers
2. Compare caps and floors across products
3. Understand policy costs and break-even points

Build Your Protected Floor

1. Determine minimum income needs in retirement
2. Calculate how much protected assets you need to cover that floor
3. Begin funding while you still have time for cash value growth

---

Ready to build a volatility-proof retirement?

Schedule a Retirement Protection Review →

---

This article is updated periodically to reflect current market conditions. Last updated: December 8, 2025

Related reading:

• Indexed Universal Life Explained
• Section 7702 Tax Benefits
• Tax-Free Retirement Income