Retirees fear market volatility, and volatility is a risk flagged by financial planners, provided you are taking professional inputs. However, volatility risk is not as dangerous — we will discuss why. The bigger risks are (a) Sequence-of-returns risk (a potent one) (b) Longevity risk (living too long) and (c) Inflation risk (the silent destroyer). We will also look at how to address these risks.
Volatility risk
Returns from market-based investments are not like a bank deposit, it does not move in a straight line. When you are checking your portfolio report, one fine morning, your returns may look much lower than when you last checked it.
In this context, equity is a high-risk asset i.e. volatility is relatively higher. Fixed income or debt is relatively less risky, as returns are more stable than equity. It is advisable that retirees do a proper balance between equity and debt in the investment portfolio, and this approach is well known.
Sequence risk
Sequence risk, also known as sequence of returns risk, is the danger that experiencing poor investment returns in the early years of retirement, combined with ongoing portfolio withdrawals for living expenses, will significantly increase the chance of running out of money prematurely. This risk is particularly impactful during the first five to 10 years of retirement because withdrawals may lead to sale of assets at lower than principal prices (i.e. at a loss), permanently reducing the principal available to benefit from potential future market recoveries.
In the accumulation phase (working years), market downturns can be an opportunity to buy assets at lower prices (rupee-cost averaging).
In retirement, the dynamic reverses; withdrawals during a bear market leads to “rupee-cost ravaging,” where more shares are sold to meet the required cash flow, making it difficult for the portfolio to recover.
Two retirees with the same starting portfolio and the same average annual return over 30 years can have vastly different outcomes based purely on the order in which those returns occur.
The one who experiences losses in the first five years is at a much higher risk of portfolio depletion and may run out of money. How to deal with sequencing risk?
Build a cash reserve/bucket strategy: Set aside one to three years’ worth of living expenses in safe, liquid assets like Bank Deposits or Liquid Funds. This buffer allows you to cover expenses during market downturns without selling investments at a loss, giving the portfolio time to recover.
Longevity risk
A retired person may have an approach “I don’t want to die with unused money.” If your children are well settled and earning well, you need not leave a legacy from your hard-earned money. However, longevity risk is outliving your capital i.e. savings kitty. Longevity risk is growing because of (a) rising life expectancy (b) better healthcare and (c) your spouse may live longer.
How to deal with longevity risk? When you are planning for the golden phase of your life — while doing the excel calculations — put a number higher than you are likely to live.
Why retirees underestimate inflation risk? Inflation feels low year-to-year – it is measured as how much prices went up over one year, but compounds brutally over decades. Medical inflation often exceeds headline consumer inflation. Fixed pensions lose relevance over time due to inflation. For a perspective, if inflation rate is say 5% per year, purchasing power will halve in approximately 14 years. The calculation is simple: divide 72 by the inflation number you have in mind. How to deal with it? Need not over-prepare, this is inevitable. However, your allocation to equity, debt, gold etc., should be appropriate as per your risk appetite and objectives.
Tips for retirees
Take care of these aspects in retirement planning — Bucketed or layered portfolios: near-term expenses in low volatility assets (e.g. Liquid Funds/ Debt Funds) and growth assets (e.g. equity) untouched during bad years; Lower initial withdrawal expectations: 3.5-4.5% instead of rule-of-thumb 6-7% per year. You should have something in liquid funds or bank deposits in the initial years, to address sequence risk.
Have some equity in the portfolio, relatively on the lower side since you are a senior citizen now, for the long term. It is an inflation hedge, not a growth luxury.
(Joydeep Sen is a corporate trainer (financial markets) and author)
Published – January 26, 2026 06:04 am IST
