Rules-Based Active Management Shields Retirees When Markets Fall

The biggest retirement mistake isn't choosing the wrong investments—it's treating retirement as if it were a single event rather than an ongoing process with multiple decision points. After more than two decades working with state employees and educators approaching retirement, I've witnessed this fundamental misunderstanding repeatedly.

Most traditional retirement planning focuses almost exclusively on accumulation—building the largest possible nest egg. While important, this approach fails to address the unique challenges retirees face once they begin drawing down that nest egg. The game changes dramatically at this point, and so should the investment approach.

Retirement Is a Journey, Not a Destination

When working with clients at Houston First Financial Group, particularly those from the education and healthcare sectors, I emphasize that retirement planning doesn't end when you receive your gold watch. It's a dynamic, multi-faceted process that continues throughout your retirement years.

Market volatility, healthcare expenses, pension complications, and Social Security optimization all require ongoing attention and adjustment. Many state employees I work with are surprised to learn about the complexities of pension choices and retiree healthcare options.   

A market decline near retirement can force postponement of retirement plans or dramatically reduce sustainable withdrawal rates. This vulnerability to market timing requires a different approach than the simple buy-and-hold strategy that might have served you well during accumulation years.

Why Retirees Face Different Investment Math

Sequence of return risk represents one of the most significant mathematical challenges for retirees. Unlike investors in accumulation phase, who can often wait out market downturns, retirees taking withdrawals during market declines face a double penalty—they're selling assets at depressed prices and those assets are no longer in their portfolio to participate in the recovery.

This creates a mathematical asymmetry. A 30% market decline followed by a 30% recovery doesn't return you to your starting point—you've actually lost about 9%. For a retiree taking withdrawals during this cycle, the damage is even worse and potentially permanent.

A 10% market correction is always in the future—it's just a question of when. Being prepared in advance provides the best defense against this mathematical reality. This preparation is where rules-based active management offers particular value.

Active Management for Distribution, Not Just Accumulation

The criticism that active management underperforms passive strategies over the long term oversimplifies the realities faced by retirees drawing down their portfolios. This argument assumes you're in accumulation phase without withdrawals.

For retirees, the equation changes. They're not just chasing returns—they're managing sequence risk, income stability, and downside protection. Active management—specifically rules-based approaches focused on risk mitigation—provides value not by beating the market in all environments, but by avoiding catastrophic losses during early retirement.

The goal isn't higher returns in every market cycle. It's preserving the ability to take sustainable withdrawals throughout retirement, even in turbulent markets. A well-designed active approach optimizes for longevity, income stability, and peace of mind rather than benchmark-beating performance.

Creating Financial Guardrails Through Rules

The most striking transformation I witness in clients who adopt rules-based approaches is the profound sense of relief they experience. Knowing there are proactive stops in place—what I think of as catastrophic stops—gives them confidence that their retirement won't be derailed by market volatility.

Rules-based management creates guardrails against emotional decision-making during market turmoil. Most investors make their worst decisions during periods of market stress, often selling near bottoms and buying near peaks. A predetermined set of rules removes this emotional element, allowing for more rational portfolio management.

While I maintain proprietary triggers and methodologies for my clients' portfolios, the fundamental principle involves establishing clear, predetermined thresholds for action. These might include:

• Defined exit points to limit downside losses
• Technical indicators that signal potential market weakness
• Volatility measures that trigger defensive positioning
• Systematic rebalancing during extreme market conditions
• Income stabilization mechanisms that protect withdrawal capabilities

These rules aren't designed to predict markets or time them perfectly. They're designed to manage risk and protect against the most damaging scenarios for retirees.

The Tax Efficiency Misconception

A common objection to active management approaches concerns tax efficiency. However, for most of my clients—state employees, educators, and healthcare workers—this concern is largely neutralized because their investments are primarily in tax-advantaged retirement accounts like 403(b)s and IRAs.

Within these retirement vehicles, there are no taxable events when trades occur. This creates a perfect environment for rules-based active management, allowing for tactical adjustments without tax penalties. The focus can remain purely on risk management and return optimization without tax considerations clouding the decision-making process.

For taxable accounts, tax implications certainly warrant consideration, but even there, the potential benefits of avoiding significant drawdowns often outweigh the tax costs of tactical adjustments for retirees.

From Theory to Practice: Real-World Protection

Working with state employees and educators approaching retirement has given me a front-row seat to the impact of market volatility on retirement plans. When markets decline precipitously, those with traditional buy-and-hold approaches often face difficult choices—delay retirement, reduce withdrawal rates, or risk portfolio depletion.

In contrast, clients with rules-based protections in place experience less portfolio damage, maintaining their ability to generate reliable retirement income. This isn't about theoretical outperformance—it's about practical retirement security.

During my years hosting the Money Matters podcast, I've interviewed countless financial professionals and retirees. The consistent theme among successful retirees is preparation for market uncertainty through systematic approaches rather than emotional reactions.

How to Implement Rules-Based Protection

While sophisticated rules-based systems often require professional management, retirees can incorporate basic protective principles even without professional guidance:

First, maintain a cash buffer sufficient to cover 1-2 years of withdrawals, reducing the need to sell during market declines.

Second, establish a withdrawal hierarchy that prioritizes which accounts and assets to tap in different market conditions.

Third, consider simple trend-following methods that reduce exposure when markets demonstrate persistent weakness.

Fourth, implement automatic rebalancing, but with modifications that limit buying into falling markets too quickly.

Fifth, develop a written plan for market declines before they occur, detailing specific actions at different threshold levels.

These basic principles don't replicate sophisticated management systems, but they provide meaningful protection against the most damaging scenarios.

The Future of Retirement Security

Looking ahead, several factors will likely increase the importance of rules-based approaches for retirees. First, historically high market valuations suggest potentially lower future returns and increased correction risk. Second, longer lifespans mean retirement portfolios must last decades, increasing sequence risk exposure. Third, the shifting landscape of pensions and Social Security creates greater reliance on personal savings.

For state employees and educators specifically, pension calculations and coordination with Social Security create additional layers of complexity that require dynamic management throughout retirement.

The retirement landscape of tomorrow will require more adaptive approaches than the static buy-and-hold strategies of yesterday. Those who recognize retirement as an ongoing journey requiring active navigation will be better positioned for long-term security.

Beyond Returns: Peace of Mind in Retirement

Perhaps the most overlooked benefit of rules-based management is psychological. The sense of relief my clients experience knowing their retirement isn't subject to market whims allows them to focus on enjoying retirement rather than worrying about it.

Traditional approaches often tell retirees to "stay the course" during market turmoil—advice that's easier given than followed when your livelihood is at stake. Rules-based approaches acknowledge human psychology, building protection into the system rather than relying on perfect investor behavior.

After more than two decades helping people transition into and through retirement, I've found that successful retirement isn't just about mathematical optimization—it's about creating financial security that supports life goals and reduces anxiety.

The biggest retirement problem isn't poor investment selection. It's thinking retirement is a single, static event rather than a dynamic journey. Rules-based active management acknowledges this reality, providing retirees with both financial and emotional security through changing market environments.

By addressing the unique challenges retirees face—particularly sequence of return risk and the need for stable income—rules-based approaches offer tangible benefits beyond what traditional buy-and-hold strategies can provide. For retirees, it's not about beating the market—it's about ensuring the market doesn't beat you.

Christopher Hensley is President and CEO of Houston First Financial Group, a Retirement Income Certified Professional®, Certified Estate Trust Specialist ™ and host of the Money Matters podcast. He specializes in helping state employees, educators, and healthcare professionals successfully navigate retirement planning complexities through disciplined, rules-based investing.

These are the opinions of Christopher Hensley and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Diversification and asset allocation strategies do not assure profit or protect against loss. Past performance is no guarantee of future results. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk.