Retirement is often pictured as a finish line—set a date, stop working, and start enjoying what you’ve built. But the market doesn’t recognize calendar milestones. A sharp downturn right before retirement (or in the first few years after) can feel uniquely disruptive, because it collides with the moment you begin withdrawing from your portfolio.
This is one of the most important planning conversations we have with pre-retirees and new retirees: not “Will the market drop?” but “What happens to our plan if it does?”
The key risk: “Sequence of returns” in the first 5 years
A market decline in your 30s or 40s can be unpleasant, but you typically have two advantages: time and ongoing contributions. Near retirement, those advantages shrink. When withdrawals begin, poor returns early on can do more damage than poor returns later—because you’re taking money out while prices are down.
This is known as sequence-of-returns risk. Two retirees can earn the same average return over 20–30 years, but if one experiences a steep decline early (while withdrawing), they may have a harder time sustaining the same lifestyle.
In practical terms, a downturn in the first five years of retirement can:
- Increase the chance you may have to sell investments at depressed prices to fund spending
- Reduce the portfolio’s ability to rebound (because fewer shares remain)
- Create pressure to cut spending or adjust plans at the worst possible time
- Elevate stress—leading to emotional decisions that may not align with long-term goals
The goal isn’t to predict the next correction. It’s to build a retirement approach that’s prepared for one.
Why we often recommend a 3-year emergency fund before retirement
Earlier in life, a traditional emergency fund of 3–6 months of expenses can be a smart guideline because it’s designed mainly for job-loss risk, surprise expenses, and short-term disruptions.
Pre-retirement is different. You’re no longer just buffering “life surprises”—you’re also preparing to address market volatility right as withdrawals start.
That’s why we often recommend a larger, retirement-specific cash reserve—often around 3 years of planned withdrawals (sometimes adjusted based on pension/Social Security timing, spending flexibility, and overall household balance sheet).
A 3-year reserve is not about earning a high return. It’s about buying time and options.
If markets fall, this reserve may help you:
- Cover spending needs without selling stocks during a downturn
- Give your risk-based investments a chance to recover
- Reduce the pressure to “do something” emotionally
- Create flexibility to delay optional expenses (travel, large purchases) until conditions improve
It’s a practical tool for helping retirees from turning a temporary market decline into a permanent plan disruption.
A quick look at history: corrections, bear markets, and recoveries
Market declines are normal. The stock market has experienced many pullbacks over time, including:
- Corrections (commonly defined as drops of about 10% or more) which have happened regularly.
- Bear markets (commonly defined as declines of about 20% or more) which occur less frequently but can be more intense.
While every cycle is different, historically:
- Many corrections have lasted weeks to a few months.
- Many bear markets have taken several months to over a year to reach their bottom.
- Recoveries back to prior highs often take additional months to multiple years, depending on the cause of the decline and the economic backdrop.
Two important points for retirement planning:
- The “down” part can be faster than the “up” part. Markets sometimes fall quickly, but recoveries can be uneven.
- Your plan should not rely on perfect timing. The earliest years of retirement are exactly when we want to reduce the odds that you have to sell long-term investments at the wrong time.
(And if you’re thinking, “But what if the next downturn is worse than average?”—that’s exactly why we stress test.)
Why “different buckets” can help
A bucket strategy is a way of aligning money with time horizon and purpose—so your near-term spending isn’t overly dependent on what the market does next month.
While each household is unique, buckets often resemble:
Bucket 1: Near-term spending (now–2/3 years)
Typically cash or very conservative holdings meant to fund withdrawals and emergencies.Bucket 2: Mid-term stability (roughly 3–10 years)
Often high-quality bonds and more moderate investments intended to provide stability and replenish near-term cash during normal markets.Bucket 3: Long-term growth (10+ years)
More growth-oriented investments designed to help fight inflation and support later-life spending.
The purpose of buckets isn’t to “beat the market.” It’s to create a system where you’re less likely to sell growth assets after they’ve dropped—because your paycheck for the next few years doesn’t depend on them.
What you can do now to prepare for a downturn
If you’re approaching retirement—or you’re within the first five years—these are the planning considerations that tend to matter most:
- Validate your spending plan. Separate needs, wants, and “nice-to-haves,” so you know what’s flexible if markets get rough.
- Confirm your withdrawal strategy. Which accounts will you draw from first, and why?
- Review your investment risk. Your portfolio should reflect your capacity for loss and your willingness to stay the course.
- Build a retirement cash reserve. For many households, having a larger buffer (often around 3 years) may reduce forced selling risk.
- Stress test the plan. Model downturns early in retirement, include inflation, and evaluate how resilient the plan is.
If you’re unsure about your current risk, let’s stress test your plan
If you’re not confident about your investment risk level—or you’d like to see how your retirement plan holds up under market downturn scenarios—reach out. A thoughtful stress test can clarify what’s within your control, what tradeoffs exist, and what adjustments (if any) could improve your long-term confidence.
This information is for educational purposes only and is not individualized investment, tax, or legal advice. Investing involves risk, including loss of principal. Past performance does not guarantee future results.