What Happens If the Market Crashes During Retirement?
A stock market downturn is never welcome, but its timing matters a great deal. When a crash happens early in your retirement, it can have an outsized effect on your long-term income security.
Get Your Retirement Income Stability AnalysisWhy a Crash Early in Retirement Hurts More
Imagine you retire and begin withdrawing money from your 403(b) or IRA. If the market drops sharply in the first few years, you are selling investments at lower prices just to pay your bills. That leaves fewer shares to participate when the market eventually recovers.
The same percentage drop later in retirement, when you have fewer years left to fund, does less damage. This timing risk is called sequence-of-returns risk.
How Sequence-of-Returns Risk Works
Sequence-of-returns risk is the danger that the order of your investment returns — not just the average return — can determine how long your savings last. Two retirees with the same average return over 25 years can have very different outcomes if one experiences bad returns early.
The one who faces a crash first may run out of money years sooner. This is why relying entirely on market-dependent accounts can be risky, even when the long-term averages look good.
Why a Pension Cushions a Downturn
Illustrative. A pension keeps arriving regardless of market swings, covering essentials while the rest recovers.
Your Pension: A Built-In Shock Absorber
A defined-benefit pension does not care what the stock market did yesterday. Your monthly payment is based on your years of service and salary, not investment performance. During a market crash, your pension keeps arriving like a paycheck, covering essential expenses and reducing the need to sell investments at a loss.
That gives your market-dependent accounts time to recover. For educators, a pension is one of the most powerful tools for weathering market storms. See how much of your income is guaranteed →
Steps to Protect Your Income From Market Swings
Even with a pension, you can take additional steps to manage market risk:
- Keep one to two years of living expenses in a cash buffer, so you are not forced to sell investments during a downturn.
- Use a flexible withdrawal strategy that lets you spend less when account values are down.
- Consider using a portion of savings to add another layer of guaranteed income.
These moves can help you avoid locking in losses at the worst possible time.
What If You Don't Have a Pension?
Not all educators have a full pension, especially those who split careers between public and private sectors. If your guaranteed income is limited, the steps above become even more important.
Building a larger cash buffer, delaying Social Security to increase your guaranteed benefit, and being conservative with withdrawal rates can all help compensate for the lack of a pension. Organize old accounts first →
Frequently Asked Questions
What is sequence-of-returns risk?
It is the risk that poor investment returns early in retirement will deplete your savings faster than if those same poor returns happened later, because you are withdrawing money while the account is down.
How does a market crash affect my 403(b)?
The account value will fall. If you are taking withdrawals, you may have to sell more shares to get the same amount of cash, which can shorten the life of your savings.
Can I lose my pension if the market crashes?
No. Your pension is a promise from your employer or state, not an investment account. Its payments are not directly tied to market performance, so a crash does not reduce your monthly benefit.
Should I sell my investments during a market downturn?
Selling during a downturn locks in losses. If you have a cash buffer and guaranteed income covering your needs, you may be able to wait for markets to recover before selling.
Is Your Retirement Income Built to Withstand a Downturn?
A complimentary Retirement Income Stability Analysis shows how much of your income is shielded from the market. Built for educators, by a former educator.
Get Your Retirement Income Stability AnalysisThis page is educational and is not investment, tax, or legal advice. Investing involves risk, including possible loss of principal. Please consult a qualified professional about your specific situation.