With that, let’s come to the topic at hand – retirement. Most people can’t choose when they will retire. I say this because while social media glorifies the FIRE (financial independence, retire early) movement, the reality for the vast majority is decades of work and retirement around 55-60. This means choosing whether to retire in a bull market or a bear market is a luxury that is not available to most.

Since markets move in cycles, some people will end up retiring in a bull market and others in a bear market. And of course, some in between. Being aware of the ongoing cycle and how the market will look around your retirement date can go a long way in helping you plan for it more effectively.

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Let’s consider a simple example.

Imagine it’s early 2008 and you are about to retire in a few months. Since the past few years have been great for equity markets, your confidence is sky-high and you decide to retire with a 75:25 equity:debt portfolio. Say your portfolio size is ₹2 crore, with ₹1.5 crore in equities and ₹50 lakh in debt. You plan to withdraw ₹50,000 as monthly income at the start.

Now we all know what happened in the 2008-09 financial crisis. Markets around the world crashed, and even ours were down 50-60%. Your ₹1.5-crore equity portfolio collapses to ₹75 lakh. It’s a double whammy, as not only has the market slashed your portfolio, but you have been withdrawing money from it for retirement expenses.

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This is what is often referred to as ‘sequence risk’. Think of it as a kind of worst-case scenario. You are about to retire with an adequate corpus but your luck decides to hand you two or three years of falling markets. If you don’t handle it well, you could end up running out of money before running out of time. That’s a scary situation for a elderly person, isn’t it?

A year or two of poor initial returns won’t affect a conservative retirement portfolio. But for an aggressive one (with more equity), those initial losses will be damaging even if there is a strong recovery in equities. This is a huge risk that more people aren’t aware of and isn’t discussed nearly enough.

The danger of averages

You only get one shot at planning your retirement. While it’s tempting to use random thumb rules or average figures to plan for retirement, such a plan may not be resilient to stress. The risk of using (only) average figures is well summed up by Howard Marks, who said, “Never forget the six-foot-tall man who drowned crossing the river that was five feet deep on average.”

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Whether you acknowledge it or not, the risk mentioned above is real. And while a roaring bull market gives people a feeling of invincibility, this can be catastrophic when the tide turns, especially for those nearing retirement. Markets have been very kind to all of us over the past few years. But if the past has taught us one thing, it’s to be careful in such situations.

If you are not sure how to manage this risk, please sit down with a competent, unbiased investment advisor. They can help you create a diversified, multi-bucket strategy for retirement and decide a safe withdrawal rate after assessing the state of the markets and various potential scenarios in the future.

Dev Ashish is a Sebi-registered investment advisor and founder of Stable Investor.