How to Navigate Market Volatility in Retirement

You've spent decades building your retirement nest egg, carefully contributing to KiwiSaver, perhaps adding investment property or managed funds to the mix. Then you retire, start drawing down your savings, and the markets take a tumble. Suddenly, you're not just watching your balance fluctuate on paper. You're actually withdrawing money during a downturn, locking in losses that can never recover.

This scenario keeps many New Zealand retirees awake at night, and for good reason. Market volatility affects retirees differently than it does people still working and saving. When you're in accumulation mode, market dips can actually be opportunities to buy low. But when you're in drawdown mode, volatility becomes a genuine threat to your financial security.

The good news? There are proven strategies to navigate market turbulence without abandoning growth assets entirely or losing sleep every time the news mentions a correction.

When you're still working and contributing regularly to your KiwiSaver or other investments, market volatility is largely noise. You're buying assets regularly regardless of price, which means you naturally buy more when prices are low. This dollar-cost averaging smooths out the bumps over time.

But retirement flips this dynamic on its head. Now you're a net seller, withdrawing money to fund your lifestyle. If the market drops 20% and you need to withdraw $30,000 for living expenses, you're forced to sell more units or shares at depressed prices. Those units can never participate in the eventual recovery.

This phenomenon, known as sequence of returns risk, can significantly impact how long your retirement savings last. Two retirees with identical portfolios and identical average returns can end up with vastly different outcomes based solely on the order in which those returns occur.

Research from the Commission for Financial Capability (Sorted) has consistently shown that New Zealanders underestimate the impact of market volatility on retirement income, with many assuming that average historical returns will translate directly to their personal experience.

The most effective tool for managing market volatility in retirement is surprisingly simple: maintain a cash buffer that covers 2-3 years of living expenses. This isn't about market timing or getting clever with predictions. It's about creating options.

When markets are performing well, you draw from your growth investments as planned. But when markets tumble, you have the luxury of leaving those investments alone to recover while drawing from your cash reserves instead. This simple strategy breaks the forced-selling cycle that can devastate retirement portfolios.

For example, if you need $50,000 annually beyond NZ Super to fund your retirement, you might keep $100,000-$150,000 in term deposits or high-interest savings accounts. Yes, this money earns lower returns than shares or growth funds. That's the entire point. It's insurance against being forced to sell at the worst possible time.

Some retirees structure this using what's known as the bucket strategy, maintaining separate pools of money earmarked for different time horizons: immediate needs (cash), medium-term needs (conservative investments), and long-term growth (shares and growth funds).

You've likely heard that diversification reduces risk, but understanding exactly how it helps during volatile periods is crucial. Diversification works because different assets don't move in lockstep. When New Zealand shares drop, international bonds might hold steady. When growth assets stumble, income-producing investments may provide stability.

For New Zealand retirees, proper diversification typically means spreading investments across:

• Asset classes: Shares, bonds, property, and cash
• Geographic regions: New Zealand, Australia, US, Europe, and emerging markets
• Investment types: KiwiSaver, PIE funds, direct shares, term deposits
• Sectors: Technology, healthcare, finance, utilities, consumer goods

According to Financial Markets Authority guidance, many Kiwi investors maintain overly concentrated positions in New Zealand assets despite our market representing less than 0.1% of global share markets. This home bias can amplify volatility risk unnecessarily.

The goal isn't to eliminate volatility entirely, which is impossible if you want meaningful growth. Rather, diversification aims to smooth the ride and ensure that no single market event can derail your entire retirement plan.

Market volatility inevitably pushes your portfolio away from your target allocation. Shares soar and suddenly represent 70% of your portfolio instead of the 50% you planned. Or they crash and drop to 30%. Left unmanaged, this drift can leave you taking either too much or too little risk for your circumstances.

Regular rebalancing addresses this by systematically buying low and selling high. When shares drop in value, you sell some bonds and buy more shares to restore your target allocation. When shares surge, you sell some and move proceeds to bonds or cash. This disciplined approach forces you to act contrary to your emotions, which tend to want to buy more of what's rising and sell what's falling.

Most retirees benefit from reviewing their allocation quarterly or semi-annually, though major life changes or significant market moves (20%+ swings) may warrant additional reviews. The key is having a predetermined rebalancing policy before market stress occurs, so you're executing a plan rather than making emotional decisions.

Keep in mind that rebalancing within PIE funds (Portfolio Investment Entities) is generally more tax-efficient than rebalancing across different account types, as you won't trigger taxable events. Your KiwiSaver annual statement should show your current allocation clearly.

Many retirees discover their true risk tolerance only when markets actually fall, not through hypothetical questionnaires. You might think you're comfortable with volatility until you watch your balance drop $80,000 in a month. That's when theoretical risk tolerance meets reality.

A useful framework is to separate your risk capacity (how much risk you can afford to take) from your risk tolerance (how much volatility you can psychologically handle). You might have the financial capacity to hold 70% in growth assets, but if a 20% market drop causes you to panic-sell, your actual tolerance is lower.

Factors that typically influence appropriate volatility exposure in retirement include:

• Time horizon (are you 65 or 85?)
• Total savings relative to spending needs
• Availability of other income sources (NZ Super, pensions, rental income)
• Health status and likely longevity
• Legacy goals for children or charities
• Past experience with market downturns

There's no shame in preferring a more conservative allocation if it lets you sleep at night. The best investment strategy is one you can actually stick with through various market conditions. A moderate allocation you maintain is better than an aggressive allocation you abandon during the first serious downturn.

Understanding what to avoid can be just as valuable as knowing what to do. Here are the most common mistakes retirees make during volatile markets:

Don't check your balance obsessively. Monitoring your portfolio daily during market turmoil doesn't help you make better decisions. It just increases stress and makes emotional reactions more likely. Quarterly reviews are sufficient for most retirees unless you're actively rebalancing.

Don't abandon your plan at the bottom. Markets have historically recovered from every previous downturn, though past performance doesn't guarantee future results. Selling growth assets during a crash locks in losses and means you miss the eventual recovery. If you need money during a downturn, draw from your cash buffer instead.

Don't try to time the market. Predicting short-term market movements is extraordinarily difficult, even for professionals. Trying to sell before crashes and buy before recoveries typically results in selling low and buying high, the opposite of what works. Time in the market beats timing the market.

Don't make major allocation changes based on predictions. Whether it's forecasts of doom from financial media or optimistic projections from fund managers, predictions about market direction have poor track records. Base your allocation on your personal circumstances and time horizon, not market forecasts.

Don't forget about inflation. Retreating entirely to cash might feel safe during volatility, but it exposes you to the certainty of purchasing power erosion over time. Even retirees need some growth exposure to keep pace with rising costs across 20-30+ year retirements.

A fixed withdrawal amount works well during stable markets but can amplify problems during volatility. Consider building flexibility into your retirement spending approach:

The guardrails approach sets upper and lower bounds for your portfolio value. If your balance exceeds the upper guardrail, you increase spending. If it falls below the lower guardrail, you reduce discretionary expenses temporarily. This systematic approach helps preserve capital during downturns without requiring constant adjustments.

The percentage method withdraws a fixed percentage of your current balance each year (commonly 4-5%). This automatically reduces spending during market drops and increases it during strong periods, creating a self-stabilizing system. The downside is less predictable income year-to-year.

The essential/discretionary split divides expenses into non-negotiable costs (housing, healthcare, food) and flexible spending (travel, dining out, gifts). During market stress, you maintain essential spending from your cash buffer while reducing discretionary expenses temporarily, allowing growth assets time to recover.

Whatever approach you choose, some flexibility in your spending creates valuable breathing room during inevitable market downturns. This might mean delaying that big overseas trip by a year or two, dining out less frequently, or postponing home renovations until markets stabilize.

For practical guidance on structuring your withdrawals, see our article on safe withdrawal rates for New Zealand retirees.

While this article provides educational information about managing volatility, personalised advice can be particularly valuable during turbulent markets. A licensed Financial Advice Provider can help you assess whether your current strategy remains appropriate given your specific circumstances, time horizon, and goals.

Professional advice becomes especially valuable if you're experiencing:

• Significant anxiety about market movements affecting your sleep or wellbeing
• Uncertainty about whether your allocation matches your actual risk tolerance
• Major life changes (health issues, divorce, inheritance) during volatile markets
• Complexity in your financial situation (multiple properties, business interests, trusts)
• Difficulty sticking to your planned strategy during market stress

The cost of advice is often modest compared to the potential cost of poor decisions during stressful market periods. Think of it as paying for a clear-headed perspective when your own emotions might be clouding judgment.

This article is general information only and does not constitute personalised financial advice. For advice tailored to your situation, speak with a licensed Financial Advice Provider. You can find a registered adviser at fma.govt.nz.

Market volatility feels intense when you're living through it, but zooming out provides valuable perspective. New Zealand and global markets have experienced numerous significant downturns: the 1987 crash, the early 2000s tech bubble, the 2008-2009 global financial crisis, the 2020 COVID crash. Each felt catastrophic at the time. Each eventually recovered.

Historical data from the Reserve Bank of New Zealand shows that while short-term volatility is normal, longer-term trends have generally been upward, albeit with significant bumps along the way. A diversified portfolio held for 10+ years has historically had a high probability of positive real returns, even accounting for inflation.

This doesn't mean future results will mirror the past, but it does suggest that well-diversified investors who maintain discipline through volatile periods have historically been rewarded for that patience. Your retirement likely spans 20-30 years or more, which provides time for multiple market cycles to play out.

The retirees who navigate volatility successfully aren't those who never experience market drops. They're the ones who prepare for volatility in advance, maintain appropriate buffers, stick to sensible strategies, and avoid making permanent decisions based on temporary circumstances.