Can I avoid market drops entirely?
No one can predict them. What you can do is plan so that a drop early in retirement does not force you to sell at the worst time to pay essential bills.
Market and longevity risks
What Happens If the Market Drops Early in Retirement?
A market drop early in retirement can shrink savings faster than the same drop later on. While you are withdrawing money, you must sell more shares at low prices to pay the bills, and that money is not there when markets recover. This timing problem is called sequence of returns risk. It can shorten how long savings last even when long-term average returns look fine.
Written and reviewed by Dan Hopwood, Retirement Income Specialist · Retirement Income Knowledge Center
A simple example
Even if the market later recovers, the smaller balance has less money working for you, and future withdrawals are a bigger share of what is left.
Illustrative $500,000 with $30,000 withdrawn each year
- Year 1 loss of 20%, then withdrawal
- About $370,000 left
- Same withdrawal, no loss in Year 1
- About $470,000 left
- Difference after one year
- About $100,000
Illustration only. Withdrawal taken at year end, no taxes or fees. Real results depend on actual returns and timing.
Why the first years matter most
Early in retirement, your savings are usually at their largest and you have the most years of withdrawals ahead. Losses at that point affect every year that follows. The same loss late in retirement touches a smaller balance with fewer years to go.
Ways retirees prepare
- Knowing which essential bills are already covered by Social Security, pensions or annuity income.
- Setting aside money for the next few years of spending so fewer sales happen at low prices.
- Being willing to trim lifestyle spending for a year or two after a large drop.
- Testing a plan against early losses before retiring, not after.
See how early losses could affect your savings
Enter your savings, planned withdrawals and time horizon. The calculator compares how the same average return can play out differently when losses come early.
Open the Sequence of Returns Risk CalculatorFree • Results on-screen right away • No email required
Common questions
Is this the same as sequence of returns risk?
Yes. Early losses are the most common way sequence of returns risk shows up for retirees taking withdrawals.
Does this matter if I'm not withdrawing yet?
Much less. Sequence risk mainly matters when money is coming out. Before retirement, time can help you recover without selling.
What should I do if the market drops right before I retire?
Avoid rushed decisions. Look at how much of your monthly income depends on savings, whether you have a cash reserve for the next year or two, and whether you could delay or reduce withdrawals for a while. This page is educational and not a recommendation for any investment action.
How can I protect retirement income from a market crash?
People often lower their reliance on savings in the first years by covering essential bills with Social Security, a pension or an annuity, and by keeping a cash reserve. Annuity guarantees are subject to the claims-paying ability of the issuing insurance company. No approach removes all risk.
Why do the first five years of retirement matter so much?
Losses in the first years hit your largest balance just as withdrawals begin, leaving less to recover later. Losses late in retirement affect fewer remaining years. That is the core of sequence of returns risk.
What does it mean to retire into a bear market?
It means markets are falling as you start drawing income. Withdrawing from a falling balance locks in losses. Having other income or cash to lean on can reduce how much you must sell.
How does steady income reduce pressure to sell in a downturn?
When Social Security, a pension or an annuity cover essential bills, you need less from savings during a bad year. That can let you pause or reduce withdrawals. Annuity income is subject to the claims-paying ability of the issuing insurance company.
Should I cut withdrawals after a big market loss?
Some retirees reduce or pause extra withdrawals after a large loss to give savings a chance to recover. How much depends on your budget and other income. This is educational, not a recommendation for any investment action.
This page is educational and general in nature. RetirementLeverage™ and Retirement Planning Store, Inc. do not provide individualized investment, securities, tax, or legal advice; please consult a qualified tax professional or attorney about your own situation. Insurance products and services may not be available in every state, and any guarantees are subject to the financial strength and claims-paying ability of the issuing insurance company.