What Happens If I Retire During a Market Downturn?
Key Takeaways:
Early losses carry extra weight. A market decline in the first years of retirement can matter more than the same decline later, because withdrawals keep coming out while values are down.
The risk can be managed, not removed. A spending reserve, flexible withdrawals, and the way your portfolio is built can each reduce how much you sell in a decline. Results depend on your household.
Prepare before your retirement date. Decide your rules while markets are calm, then review them with an advisor.
A record number of Americans are reaching retirement age right now. An estimated 4.18 million people turned 65 in 2025, the highest number on record, and this surge is expected to run through 2027.¹ Many of them are making the same decision at the same time: when to stop working and start drawing on their savings.
Nobody can say when the next market decline will arrive. Stocks came close to bear-market territory as recently as April 2025, and even the length of a recovery is impossible to predict.³ The U.S. stock market has had a seriously negative multi-year stretch only a few times in the past 92 years (1929 to 1932, 1939 to 1941, 1973 to 1974, and 2000 to 2002), but a retiree who starts withdrawals just before one feels it the most.² That is why we plan for the possibility instead of waiting on a forecast.
What Happens If You Retire Into a Down Market?
A decline early in retirement can shorten how long your savings last, because you are selling investments for income at the same time they are losing value. It does not mean your retirement is ruined. It does mean the first few years deserve more attention than the later ones.
Planners call this sequence-of-returns risk: the risk that the order of your investment returns, not just the average, affects how long a portfolio lasts once you start taking withdrawals. This article looks at that one risk. For the wider question of whether you are ready, start with our guide: Can I Retire? A Complete Guide to Retirement Readiness for Santa Barbara & Southern California.
Why Does the Order of Returns Matter So Much?
When you are still working and saving, a market drop mostly changes the price you pay for new investments. Once you retire, your portfolio is doing two things at once: earning (or losing) money and paying your bills. During an extended downturn, that combination can hit a portfolio twice.²
To raise the same amount of cash from a lower-priced portfolio, you have to sell more shares. Those shares are gone when prices recover. Poor early returns can permanently impair a portfolio, because the withdrawals you needed to take reduce the assets left to take part in a rebound.⁴
You may hear the argument that markets recover, so there is nothing to worry about. Recovery does help, but it helps less when part of your portfolio was sold along the way. A decline that arrives in year 20 of retirement usually matters less than the same decline in year one, because you need the portfolio to last fewer years afterward.
If you are still working out how much you need in the first place, our article How Much Money Do I Need to Retire? is a good companion.
Who Is Most Exposed to Early-Retirement Market Risk?
Your exposure depends on three things: how much of your spending comes from the portfolio, how much comes from other sources such as Social Security, a pension or rental income, and how soon you start drawing on it. A household whose core bills are covered by steady income has less to ask of its portfolio in a down year.
Exposure also tends to be higher if your portfolio is weighted heavily toward stocks and you have little near-term spending set aside. This varies from household to household, and a plan can be built to address it.
Many Southern California families carry extra demands that make spending harder to cut: supporting adult children, funding a planned gift, or helping with a parent's care. If that sounds like your household, build those commitments into the plan before the retirement date, not after a market drop.
This article is about managing the risk. If you want to know how much income a portfolio of about $5 million might support, that question has its own article: Can I Retire with $5 Million?
What Can You Do to Manage a Market Downturn in Retirement?
These are options to discuss with your advisor, not a prescription. Each one involves trade-offs, and the right mix depends on your situation.
Keep a Spending Reserve
We usually suggest setting aside a defined amount of near-term spending in lower-risk, easy-to-reach holdings, so you do not have to sell stocks to pay bills during a decline. It can also leave the rest of your portfolio more room to recover.
A common starting point is about a year of expenses (after counting other income such as Social Security) in cash investments, plus another two to four years of expenses in high-quality short-term bonds.⁵ The right size for you depends on your income sources, your comfort with risk, and how much flexibility your spending has.
The trade-off: money held in a reserve may earn less than other investments over long periods and may lose buying power to inflation.
Build In Spending Flexibility
We usually suggest deciding in advance which spending can bend. Being able to trim or delay some spending in a bad year can reduce how much you need to sell. Common examples include postponing a large purchase or a remodel, skipping the yearly inflation increase to your withdrawals for a year, or pacing a planned gift.
Some plans put this in writing as "guardrails": a range for spending that moves up after strong years and down after weak ones. The point is to set the rules before the market falls, so you are not making them up while it is falling.
The trade-off: flexibility can mean living on somewhat less for a while, and it works best when your essential costs are already covered.
Design the Portfolio for the Early Years
How your portfolio is divided among stocks, bonds and cash affects how it behaves in a decline. A portfolio built only for growth may feel very different once you start withdrawing from it. Holding a meaningful share in bonds is one common way to soften the impact of early losses.²
Some retirees take a more cautious stance in the years around their retirement date and adjust over time. That approach can give up growth, so we treat it as a decision to weigh, not a default. Rebalancing is part of the picture too, and it can carry costs and tax effects.
Look at the Whole Picture
When you claim Social Security and which accounts you draw from first can change how much pressure falls on the portfolio in a down year. Both depend on your health, your other income and your taxes. California tax treatment is a topic we plan to cover in a separate article.
For families with legacy goals, the plan can also decide which assets are used first and how gifts or inheritances are timed. Our estate and tax planning work looks at those choices alongside your retirement income plan.
What Mistakes Should You Avoid?
Making a large, emotional change during a decline. Selling after prices have fallen can lock in a loss you may have been able to ride out.
Treating an average return as a smooth line. Markets do not deliver an average every year, and the order of good and bad years matters once you take withdrawals.
Setting spending with no room to adjust. A budget with no flexible layer leaves selling as your only response.
Leaving the plan unreviewed after a major market move. A plan that was sound at retirement may need adjustments as markets and your life change.
You may also wonder whether you should simply wait to retire until the market recovers. Delaying can help some households, but nobody can time the market reliably. The decision depends on your full plan, including your spending, other income and goals.
Frequently Asked Questions
1. What is sequence-of-returns risk?
It is the risk that the order of investment returns, not only their average, affects how long your savings last once you are taking withdrawals. A loss early in retirement can do more damage than the same loss later, because you have sold investments that no longer take part in a recovery.⁴
2. Is it a bad idea to retire in a down market?
Not automatically. It raises the importance of having a spending plan, a reserve and some flexibility. Whether the timing works for you depends on your spending, your other income and how your portfolio is built.
3. How can retirees avoid selling investments when the market is down?
Two common tools are a spending reserve and spending flexibility. A reserve covers near-term bills so you can leave stocks alone for a time, and flexibility lets you cut back temporarily. Each has trade-offs, including lower expected growth on reserve money and a lower standard of living in tough years.
4. How many years of spending should I keep in cash?
There is no single right answer. It depends on your other income, how flexible your spending is and how you react when markets fall. A common starting point is about a year of expenses in cash investments plus two to four years in high-quality short-term bonds, which we adjust to fit the household.⁵
5. Should I delay Social Security if the market drops when I retire?
Delaying can reduce how much you need from the portfolio later, but waiting also means you may draw more from it in the meantime. The right choice depends on your health, your other income, your spouse's benefits and your taxes, so review it with a professional before deciding.
How We Plan for Market Risk in Early Retirement
At Arlington Financial Advisors, a retirement income plan looks at your spending needs, your other income, taxes, estate goals and how your portfolio is built. We review it as life and markets change, so the rules you set before a downturn are the ones you follow during it.
If your portfolio is a different size, these related guides may help: Can I Retire with $3 Million? and Can I Retire with $10 Million?
To talk through your own retirement timing and how a market decline could affect it, schedule a consultation with our team.
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