One of the most significant risks retirees face is the sequence of returns risk, which is the danger that poor investment returns early in retirement will have a disproportionate impact on long-term financial security. This is because you are selling holdings at a loss to create income, reducing the value of your assets for future distributions (and potentially shortening how long your portfolio will last before depletion). And that’s true even if the market eventually recovers. A few bad years early on can do more damage than the same bad years happening later.
One way to protect yourself from this kind of risk is by using “buffer assets.” Buffer assets are financial resources that exist outside of the primary investment portfolio. What makes them unique is their lack of correlation with the market. Unlike your regular investments, buffer assets don’t drop in value when markets do. This allows retirees to temporarily draw from these assets instead of selling investments at a loss, giving the portfolio time to recover. Once the market recovers, withdrawals can resume from the investment portfolio. It’s like having an umbrella: you don’t need it every day, but you’re glad it’s there when it rains.
Exploring the Tools in the Buffer Asset Toolbox
Cash reserves are the most straightforward buffer asset. Keeping money in a savings account or money market fund gives you easy access to cash with no risk of loss. While these funds are highly liquid, the tradeoff is that your money doesn’t grow much, which can be frustrating during strong markets.
Another option is a reverse mortgage line of credit, specifically a Home Equity Conversion Mortgage (HECM). This type of loan is based on your home equity and gives you access to a line of credit that grows over time (if unused). It can’t be frozen or canceled by the bank, which makes it a reliable resource during tough market periods. But it does require sufficient home equity and comes with upfront setup costs and ongoing interest, so it’s not ideal for everyone.
If you own a permanent life insurance policy, such as a whole life or universal life policy, you might have access to the policy’s cash value. This allows you to borrow against your accumulated cash value to cover expenses when needed. Policy loans won’t fluctuate with the market; however, they can be expensive, with fees and interest charges that can eat into your returns if you’re not careful.
Multi-Year Guaranteed Annuities (MYGAs) are issued by insurance companies and offer fixed interest over a set period while protecting your principal. If the annuity offers penalty-free withdrawals, it can serve as a reliable buffer asset. It is important to read the contract and understand the terms and surrender charges if you need to access the money early.
CD ladders are a simpler strategy. By staggering the maturity dates of multiple CDs, you ensure regular access to your money without having to break a CD early. They’re low-risk and easy to understand, though their returns are typically modest. If you have to sell a CD before maturity, you could experience financial penalties.
Lastly, there are Fixed Indexed Annuities (FIAs), which provide principal protection and returns linked to market indexes, without directly investing in the market. They offer some growth potential and are often used as long-term income tools. However, they can be complex and may come with fees or restrictions on access to your funds. It is essential to read the contract and understand the terms since each product is different.
Here’s a comparison of the benefits and drawbacks of the main types of buffer assets:
Buffer Asset Type | Description | Benefits | Drawbacks |
Cash Reserves | A separate cash allocation that is set aside for emergencies or market downturns. | Highly liquid and easy to access. No risk of loss. | Opportunity cost from low returns, especially during good market performance. Assets can lose purchasing power over time. |
Reverse Mortgage (HECM) | A line of credit that grows over time and isn’t tied to market performance. Funds can be accessed without triggering immediate repayment. | Reliable access to funds during market downturns. Cannot be frozen or canceled, and your credit line grows over time. | Upfront costs and interest accrual. Home equity must be sufficient. Not suitable for everyone. |
Life Insurance (Cash Value) | A policyholder with permanent insurance can borrow against the accumulated cash value. | Funds are not affected by market downturns. Loans can be flexible. | Opportunity costs and hidden charges. Loan interest applies. Must be structured carefully. |
Multi-year Guaranteed Annuities (MYGAs) | Insurance products with a fixed interest rate for a set term.
| Principal protection and predictable returns. Some offer partial liquidity. | Potential surrender charges and limited access to funds during the term. |
CD Ladders | Staggering CDs with different maturity dates creates a stream of predictable income.
| Simple structure with low risk. | Early withdrawal penalties and limited growth potential. |
Fixed Indexed Annuities | Insurance products that provide principal protection and returns linked to market indexes, without directly investing in the market. | Downside protection with some growth potential. | Complexity, surrender charges, and possible delays in accessing earnings. |
What Tools Don’t Work as Buffer Assets?
Buffer assets should be reliable, not volatile, since they act as a safety net when markets are down. As a result, gold and other commodities will not provide the stability needed to qualify as a buffer asset. Gold might sound like a safe haven, but its price can swing wildly, so it doesn’t offer the kind of consistency you want. In addition, while home equity lines of credit (HELOCs) can be useful in other planning contexts, they can be frozen during a downturn, making them unreliable just when you’d need them most.
Buffer assets aren’t about boosting your returns. By providing a temporary source of income when markets are down, they allow retirees to avoid selling investments at a loss and help maintain the long-term sustainability of their plan. While no buffer asset is perfect, understanding the tradeoffs can help retirees select the tools that best align with their goals and circumstances. Each type has its benefits and drawbacks, and the best choice depends on your personal situation.
Understanding the different types of buffer assets is one thing… knowing how to actually build them into your plan is another. That’s exactly what we cover in our Handling Reserves and Contingencies Workshop inside the Retirement Researcher Academy. This workshop walks you through how to think about liquidity, emergency reserves, and how to prepare for the unexpected, without sacrificing long-term growth. If you’re planning for retirement on your own, it’s a practical, research-backed guide to putting real-world guardrails in place.
Ultimately, having some kind of buffer asset in place could be the difference between staying on track and having to make tough spending cuts. If you’re working with a financial advisor, talk to them about how buffer assets might fit into your plan. And if you’re doing it on your own, it’s worth giving this strategy a closer look.
Want to learn more? Listen to Ep. 191 of the Retire With Style Podcast.
