The events that unsettle markets are usually outside our control. Political shocks, inflation, interest rates, recessions and investor sentiment cannot be predicted with any reliability. What can be controlled is the way your retirement plan is built around the life you want to fund.
That is why effective retirement planning should begin with clear objectives. If you know what your money needs to do, when it is needed and how important each goal is, investment risk can be judged in context. The aim is not to avoid volatility altogether, but to make sure short-term market falls do not permanently damage long-term plans.
The starting point for any good retirement plan is a clear set of measurable objectives. Many people initially describe their goal as wanting to be “financially secure”. While this is understandable, it is too vague to support effective decision-making. A more useful objective explains what money is needed for, how much is required and when it may be needed. For this, a SMART objective is the place to start:
For example, “I want to be financially secure” becomes much more useful if it is reframed as: “I want to spend £50,000 a year in today’s terms from age 65 and maintain that level of spending for the rest of my life.” Whether that is realistic will depend on wider circumstances, but it gives the plan something specific to test.
Once a spending objective has been defined, the plan can be assessed properly. You can consider how much capital may be required, what level of investment return is needed, how much risk can reasonably be taken and which objectives matter most. When markets fall, this provides a reference point: does the fall genuinely threaten the objective, or is it a short-term movement that the plan was designed to withstand?
Every market event feels unique while it is happening. Whether the cause is a geopolitical crisis, recession, financial shock or technological change, there is usually a compelling reason to believe that “this time is different”.
While each downturn has its own cause, periods of market weakness are a normal part of long-term investing in retirement.
The precise recovery period varies depending on the market, the portfolio and the starting point, but retirees should expect setbacks along the way rather than treat them as unusual events.
For retirees, this does not mean ignoring risk. It means recognising that volatility is a feature of investing, not a flaw. The practical question is not whether volatility can be avoided. It cannot. The question is how much volatility the plan can tolerate without forcing the wrong decisions at the wrong time.
In retirement, the timing of market volatility matters more. During the accumulation phase, falling markets can allow regular contributions to buy investments at lower prices. During retirement, the opposite can apply; withdrawals may require investments to be sold when values are depressed.
Two retirees with identical objectives and the same average investment return can experience very different outcomes depending on when those returns occur. Poor returns early in retirement can have a disproportionate effect because withdrawals may lock in losses before the portfolio has time to recover.
This is why objectives, cash reserves, diversified portfolios and sustainable withdrawal strategies need to work together. Short-term spending needs can be planned for in advance, so retirees are not forced to sell growth assets during difficult market conditions. Holding lower-risk reserves may reduce some long-term growth potential, but it can improve the consistency and resilience of the overall plan.
Cash and investments should not be viewed as competing options. They serve different purposes.
Investments are designed to support long-term growth. Cash reserves can provide short-term stability and flexibility, allowing the investment portfolio to remain focused on longer-term objectives. The important balance is holding enough cash to avoid forced selling during market falls, but not so much that long-term growth is unnecessarily restricted.
The right level of cash should be driven by the spending plan, not by a general dislike of market volatility. If a specific planned expenditure is likely over the next one to three years, it may be sensible to hold appropriate cash reserves for that purpose, while allowing longer-term money to remain invested.
There is no universal answer to how much cash should be held. Some people are comfortable with six months of expenditure; others may prefer several years. The reserve should provide enough stability and peace of mind without unnecessarily limiting the plan’s ability to meet longer-term objectives.
Once the retirement spending objective is clear, the next question is how much of that spending needs a high degree of certainty. Essential expenditure, such as household bills, food and basic lifestyle costs, may be supported by secure income sources where available. More discretionary spending can often be funded with greater flexibility. Common sources of secure income retirement are:
In the earlier example of a couple wanting to spend £50,000 a year, two full State Pensions could cover approximately half of their expenditure needs. That changes the level of pressure placed on the investment portfolio and will affect how much risk needs to be taken to meet the remaining objectives.
Once objectives are clear, investment risk can be assessed in a more meaningful way. Rather than asking whether a portfolio is simply “low”, “medium” or “high” risk, the better question is whether the level of risk is suitable for the objectives the portfolio is intended to support.
These factors can point in different directions. Someone with significant assets relative to their spending needs may have a high capacity for risk, even if they do not need to take much risk. Someone who needs higher returns to make their plan work may have a greater need for risk, but will have less capacity to accept risk. If you find yourself needing more returns in retirement to meet your objectives, that can be a sign that spending expectations should be revisited.
A risk questionnaire can be a useful starting point, but it should not be treated as providing the entire answer on its own. The result should be tested through proper conversation, including what different portfolio outcomes could feel like in real market conditions. A technically suitable plan can still fail if it is abandoned during a difficult period.
One of the most common risks in retirement planning is behavioural. During rising markets, investors can become overly confident and assume recent winners will continue to perform well. During market declines, fear can lead to selling after losses have already occurred.
The point is not that markets recover instantly, or that losses do not matter. It is that reacting after a fall can turn temporary volatility into a permanent loss if it means missing the subsequent recovery. This is why the plan matters most when markets feel least comfortable.
For retirees, this reinforces the importance of having a strategy that can survive downturns without requiring major changes. Clear objectives, appropriate cash reserves and a suitable level of investment risk all help make it easier to stay disciplined when headlines are unsettling.
The temptation during periods of market stress is to react. News coverage can make every event appear urgent and unprecedented. Successful retirement planning is rarely about making dramatic decisions in response. It is about maintaining adequate reserves, setting clear objectives, aligning investments with those objectives and avoiding emotionally driven decisions when markets become unsettled.
Market volatility can rarely be removed when investing for retirement, but it can be managed. The key is to start with clear objectives, understand which spending needs require certainty, and avoid making short-term decisions in response to market headlines.
A good retirement plan gives you a framework for decision-making when markets are unsettled. It helps answer the question that really matters: are my long-term objectives still on track?
If you are approaching retirement, already drawing from your investments, or concerned about how market volatility could affect your plans, our team can help. One of our expert advisers can work with you to understand your objectives, assess the risks and build a retirement strategy designed around what matters most to you, helping you make informed decisions when investing for retirement.
This article is for general information only and does not constitute financial advice. Individual circumstances will vary, and professional advice should be sought before making investment decisions.
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