Protecting retirement income amid market volatility

Key takeaways:

• Market volatility can significantly impact retirement savings, making it essential to choose investment strategies that can help limit downside risk.
• Investors could consider an income-centric approach to help avoid depleting their savings during market downturns.
• Higher income-producing portfolios can provide stable distributions without selling principal to meet target income requirements in different market environments.

The CBOE Volatility Index (VIX) climbed in March 2026, momentarily jumping above 31. Also known as the "Fear Gauge," it is feared by no one more than retirees who may see their life savings fall in value just as they need to rely upon their portfolio assets for income.

As mentioned in a recent article, 2026 Income Outlook, a portfolio construction approach that emphasizes higher yielding assets in retirement can help to avoid depleting savings. Today, at a time of more frequent exogenous market shocks and heightened uncertainty, we’re exploring further why we believe it is essential for investors to consider strategies that seek higher distributions to protect their wealth from dollar cost ravaging.

What is dollar cost ravaging in retirement?

“Dollar cost ravaging” refers to the negative impact on a retirement portfolio when withdrawals are made during market downturns and is related to “sequence of returns risk” which refers to the risk that the order and timing of investment returns can significantly impact the longevity of your retirement portfolio. When the market is down and shares are sold to meet an income target, it impairs the remaining principal's ability to recover and grow. However, higher income producing portfolios seek to alleviate this risk of principal erosion by generating enough cash flow to naturally meet distribution targets (through dividends) without selling shares of principal, regardless of market environment.

Let’s illustrate through an example. Imagine a retiree with a 4% annual spending need. An investment in the S&P 500 or a traditional 40/60 portfolio, which derives the majority of their returns from price appreciation, would leave the retiree exposed to potential dollar cost ravaging. The S&P 500 and a traditional 40/60 portfolio yielded 1.8% and 3.2% on average, respectively, over the last 30 years. Thus, in order to meet a 4% annual distribution need, the retiree must sell shares to fund the gap. A diversified income portfolio (in this case consisting of 20% U.S. bonds (Bloomberg Us Agg Bond Index), 40% high yield (Bloomberg US Corporate High Yield Bond Index) and 40% value stocks (S&P 500 Value Index), in contrast, has yielded 5.1% over the same period, thereby avoiding the need to sell units of principal, providing a sustainable income stream across all market environments.

This dynamic gets amplified when there is a market decline. To meet the same withdrawal amount, investors in lower yielding portfolios may need to sell more shares than if the market were stable or rising because the value of each share has dropped. This increased selling during downturns depletes portfolios faster, making it harder for investments to bounce back and grow over time.

How market declines can impact retirement withdrawals

A case study: Imagine retiring with $1 million in assets and a 4% annual income need in 2000. How would different portfolio construction approaches impact the experience over the next 25 years?

The shocking takeaway: not only does investing exclusively in the S&P 500 result in the worst outcome, but it also results in fully depleting your retirement savings in less than 25 years whereas an income-centric approach would sustain your income needs and allow for growth in your wealth over the same period!

Retirement income analogy: Selling land vs. collecting rent

Consider this analogy: imagine someone is about to retire and they have two options to fund their lifestyle for the next 3 decades:

• Option 1: Buy vacant land and sell off a parcel each year.
• Option 2: Buy an apartment building and collect rent checks.

Option 1 runs the risk of running out of land to sell while also exposing them to price fluctuations for land in any given year. Option 2 generates income while preserving their exposure to the price appreciation potential of the building over the ensuing decades (a gift for their children). Only option 2 makes sense with an objective of protecting the principal and receiving income. A strategy that requires principal erosion like option 1 can leave clients susceptible to outliving their savings.

Why today’s market volatility matters for retirees

Dollar cost ravaging can occur any time volatility strikes. Investors today are facing one of the most unpredictable market environments of the past two decades. Against this backdrop, it’s even more important for investors to understand that what they own can make or break the longevity of their retirement savings. Key takeaway: portfolios that seek to generate higher income levels can offer stable distributions regardless of whether the rollercoaster is ascending or plummeting.

Let’s explore the impact of dollar cost ravaging a bit more deeply by analyzing the impact of different portfolio construction approaches over a 20-year retirement starting each month from 1994 – 2005 (144 20-year windows in all). We assume the same $1 million starting portfolio and 4% annual distribution need. An income centric portfolio construction approach results in potentially better outcomes than a traditional 40/60 balanced approach in every instance!

Outcomes can vary depending on the prevailing market environment at the beginning of retirement.

Higher withdrawal rates can increase retirement risk

As shown below, the results become even more dramatic if a client needs to increase their distributions beyond 4%. The key takeaway from this data is that variability in outcomes increases as the income needs go up. In a 6% distribution scenario, both a traditional 40/60 portfolio and an all-equity portfolio could result in a retiree fully depleting their savings. Moreover, despite higher long-term returns, the average outcome (represented by the black bar) is no better for an all-equity approach vs. an income-centric approach. Simply put, market volatility has the power to erode a nest egg and shatter the dreams of lifelong savers.

Building retirement portfolios designed for income durability

A balanced, income-oriented approach can provide a measure of relief, helping clients pursue the income they need while seeking to mitigate the effects of downside risks. The BlackRock Multi-Asset Income Model Portfolios provide a core, diversified option for investors in retirement, and can be paired with guaranteed income sources like Social Security and annuities. These models seek to offer a number of benefits:

• Tap into a broad, diversified universe of income-producing asset classes including dividend stocks, investment grade and high yield bonds, floating rate loans, covered calls and more.
• Nimbly take advantage of market opportunities, constantly evaluating the income landscape and rebalancing on a quarterly basis.
• A whole portfolio solution available across multiple risk profiles to address the needs of all retirees, ranging from those early in retirement looking for more equity exposure to those focused more on capital preservation.

To obtain more information on the fund(s) including the Morningstar time period ratings and standardized average annual total returns as of the most recent calendar quarter and current month end, please click on the fund tile. The Morningstar Rating for funds, or "star rating", is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure (excluding any applicable sales charges) that accounts for variation in a managed product's monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods.

Performance data represents past performance and does not guarantee future results. Investment return and principal value will fluctuate with market conditions and may be lower or higher when you sell your shares. Current performance may differ from the performance shown. For most recent month-end performance and standardized performance, click on the fund ticker above.

Access exclusive tools and content

Obtain exclusive insights, CE courses, events, model allocations and portfolio analytics powered by Aladdin® technology.

Get access now