Retiring During a Down Market: What to Know

Retirement is a milestone you plan for over many years; however, a market downturn can bring uncertainty about your financial future. When the markets decline in value, so too can the assets you may rely on to fund your lifestyle after you stop working. Navigating this challenging environment requires a proactive strategy to safeguard your savings and ensure long-term security.

This article will explore important considerations regarding retiring during a market downturn, including the various challenges you may face and strategies for managing it. We’ll also discuss whether you should retire or wait until conditions improve.

Challenges of Retiring During a Market Downturn

No matter your stage of life, a down economy can drastically impact your portfolio and overall financial picture. While rising and falling prices are the norm in investing, it can be especially damaging when you retire because you may need the money as soon as possible to fund your lifestyle. When market values decrease, your investment accounts supporting your long-term plans could significantly drop in value and derail your long-term plans.

The first and potentially most significant consequence if you’re retiring during a market downturn is the sequence-of-returns risk. This refers to the effects of withdrawing funds during an economic decline, locking in losses. For example, if the value of an ETF that tracks the S&P 500 drops sharply once you retire, selling your shares now will cause you to take a permanent loss. This can be especially alarming if you must take required minimum distributions (RMDs) at age 73.

Poor market conditions can also coincide with high inflation in some cases. This results in the purchasing power of your cash eroding over time. Typical goods and services you must utilize in retirement, such as food, healthcare, and housing, may cost more, causing your dollars to go a shorter distance. Retirees on fixed income or without any inflation management strategies are most affected here.

Beyond financial consequences, market downturns can take a mental and emotional toll. Watching your portfolio value decline after years of hard work can be anxiety-inducing and cause fear-driven decisions, like abandoning your original plans or selling assets for a loss. This makes it crucial to keep a calm state of mind and be prepared for such an event, either on your own or with the help of a financial advisor.

Managing Your Retirement Finances While Markets Are Down

Market downturns can bring serious issues for retirees, but there are several strategies you can use to mitigate the impact, both before and during such conditions. These include timing withdrawals, shifting your asset allocation, and even lessening your costs as much as possible. Below is an overview of notable approaches to keep in mind:

Bucket Strategy

The retirement bucket strategy is a drawdown method that can help prevent substantial losses during market volatility. It involves dividing your savings and investments into three buckets:

• Short-term. This is for cash and income you need for living expenses and emergencies. It typically refers to savings accounts or highly liquid investments, such as a money market fund.
• Intermediate. This refers to savings you’ll need to tap into within the next 10 years. Generally, investment options like certificates of deposit (CDs) or bonds apply in this category.
• Long-term. This focuses on investments and savings you won’t need for over 10 years. It allows you to invest in growth equities for the long haul without feeling the immediate effects of a down market.

The buckets listed above allow you to balance your short-term needs with long-term growth. In a market downturn, you’ll be ready by already having cash in short-term and intermediate buckets. This, ideally, reduces your need to sell shares of long-term investments and lock in losses.

Funds for emergency expenses are included in the short-term bucket. This could apply to medical events, car repairs, or similar expenses. As mentioned above, being ready for the unexpected can help prevent you from needing to sell off securities for a loss.

Understand the Tax Implications

While it isn’t ideal to sell securities during a market downturn, it’s possible to lessen the blow by taking advantage of tax-loss harvesting. This involves selling an underperforming investment to claim the loss as a tax deduction while reinvesting in a different asset to maintain your portfolio’s intended allocation. The wash-sale rule, however, prevents you from receiving tax benefits by claiming the loss if you repurchase the security within 30 days.

Tax-loss harvesting can be quite complex if you’re not highly proficient in investing concepts. We recommend speaking with a financial advisor to help you figure out how this approach fits into your portfolio strategy.

Another area of concern is short vs. long-term capital gains taxes. If you own an asset for over 12 months and sell it, you’ll receive a more favorable tax rate. Selling an asset in a shorter period than that will incur a higher tax rate on both state and federal levels.

Reducing Spending

During periods of economic uncertainty, it may be wise to pay extra attention to your spending and budget. This is especially true if you must avoid reaching into long-term assets that may have dropped in value. In this situation, reducing discretionary expenses, such as travel or luxury items may be beneficial. However, be sure to speak with a financial advisor to determine what you can afford.

Adding Additional Income Sources

Because a down market can make it difficult to access retirement savings accounts, you may benefit from seeking additional income sources. While you may want to retire from your current job, one option is getting part-time employment to supplement your cash flow. Alternatively, you could consider, with assistance from a professional, whether it makes sense to begin taking Social Security early if you’re in dire need of cash.

Timing Retirement Withdrawals

During a market downturn, it can be hard to know when or if you should withdraw from your tax-advantaged retirement accounts, such as a Roth IRA or 401(k). This is mainly because you’re not simply drawing down a pool of cash but will need to sell securities that may have dropped in value. Withdrawing from your accounts to minimize losses, such as by selling fixed-income securities first and being aware of RMDs, can help you maintain the wealth you’ve built throughout your life.

Equities such as stocks, mutual funds, or ETFs are the most vulnerable to significant drops during volatile markets. To minimize the impact of these fluctuations, consider prioritizing cash or fixed-income investments like bonds for withdrawals. These experience less impact from market conditions, making them a better choice to avoid losses when you make withdrawals.

At age 73, you’ll also be subject to RMDs. Your RMD amount depends on your account balance and a life expectancy factor determined by the IRS. Once you know this figure, it’s important to withdraw in such a way that minimizes loss as much as possible, including targeting cash and fixed income first as mentioned above.

Finally, limiting major purchases or spending can help you avoid the need to make unnecessary withdrawals. While the market is down, avoiding locking in losses as much as possible is crucial. It’s a good idea to sit down with a financial advisor to discuss what you’re able to afford with the cash you have on hand.

Should You Retire During a Market Downturn?

Market downturns raise a critical question—is it the right time to retire? The answer depends on your personal circumstances, including your age, financial readiness, and the structure of your retirement savings. For instance, someone in their 70s may need to proceed with retirement due to age or health constraints, while a 60-year-old might have the flexibility to continue work. Similarly, those with a significant portion of their portfolio in equities may face heightened risks of locking in losses, making it essential to weigh the decision carefully.

To answer the question above, we recommend conducting a comprehensive review of your finances and assessing your emotional readiness with a financial advisor. In your assessment, consider the following questions:

• What income sources can I rely on during retirement?
• Am I willing to adjust my lifestyle?
• What is my current financial readiness for retirement?
• Do I have a withdrawal plan in place to avoid taking substantial losses?
• How will retiring now affect my long-term financial goals?

Melissa Murphy Pavone, CFP^®, CDFA^®, financial advisor and founder of Mindful Financial Partners, explains she always recommends that retirees “work closely with their CFP^® to model recovery scenarios and evaluate how their plan performs under various conditions using tools like Monte Carlo simulations.” By doing so, you’ll have a better grasp on what retirement during a tumultuous market may realistically look like.

“Retiring during a down market doesn’t mean abandoning your plans—it’s about staying flexible and proactive,” says Pavone. “Collaborating with both a CFP^® and an accountant ensures retirees can navigate tax-efficient strategies, optimize withdrawals, and make any necessary adjustments,” It’s important to be aware that markets are “cyclical” and that having a plan in place “empowers retirees to weather downturns confidently and stay on track for a secure and fulfilling retirement,” she adds.

If you don’t have a financial advisor, it’s vital to find a high-quality one who adheres to a fiduciary duty and offers the services you need. This free matching tool can connect you with a vetted professional based on your goals, risk tolerance, and current situation.