What Is a Volatility Buffer & Why It Matters in Retirement
Market ups and downs are a normal part of investing. But once you hit retirement, those swings feel a lot riskier — especially when you're pulling income out of your portfolio. That's where a volatility buffer comes in.
What a Volatility Buffer Actually Is
A volatility buffer is a pool of stable, non-correlated assets you draw from during market downturns instead of selling stocks at a loss. Think of it as a financial shock absorber: when markets drop, the buffer carries your income so your invested assets have time to recover.
At Legacy Financial, we typically build the buffer with fixed indexed annuities, cash-value life insurance, short-duration bonds, or a high-yield reserve — sized to cover one to three years of essential income.
The Real Risk: Sequence of Returns
A 20% market loss in your 40s is a temporary inconvenience. The same 20% loss in your first year of retirement — while you're withdrawing income — can shorten your retirement by a decade. That's sequence-of-returns risk, and it's the #1 reason new retirees run out of money.
A volatility buffer breaks that chain. When the market is down, you spend from the buffer. When it recovers, you refill the buffer from gains.
How We Build One for You
There's no one-size-fits-all number. We look at your essential vs. discretionary spending, guaranteed income (Social Security, pensions, annuities), and your tolerance for risk — then size the buffer accordingly.
If you'd like to see how a volatility buffer would change your own retirement income plan, schedule a complimentary review with Gerard.
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