If the market drops right before you retire, the main risk is usually not the decline itself. It's being forced to sell investments at lower prices to pay for spending in the first years of retirement. For people wanting to retire within about five years, the effect of a downturn depends largely on how withdrawals, income sources, spending flexibility, and investments are coordinated before it happens.
I'm a fee-only financial planner in Florida who works with households approaching retirement and helps coordinate retirement income, investments, taxes, healthcare, Social Security, and estate-planning decisions.
Who This Is For and Why It Matters
This article is for still-working households who expect to retire in roughly one to five years. You've saved consistently and invested well, and you now have meaningful assets spread across 401(k)s, IRAs, brokerage accounts, and possibly a pension or a military or government benefit. For many people on the Emerald Coast who want to retire, a market drop is the question underneath all the others.
That concern makes sense. A decline at the wrong time can feel like the kind of decision you can't undo. You could end up retiring into a falling market, selling at a low point, or watching one spouse feel pressured to keep working.
You don't need to predict the market. But waiting to prepare has a cost. Each year closer to retirement leaves fewer years to adjust savings and less flexibility in where withdrawals come from. It also makes it more likely that decisions get made under pressure instead of in advance.
The Root Cause: A Portfolio Without a Withdrawal Plan
Most people wanting to retire have an investment mix. Fewer have a plan for how money will come out of that portfolio once the paychecks stop.
The underlying issue is sequence-of-returns risk: the possibility that poor returns early in retirement, combined with ongoing withdrawals, may reduce a portfolio's long-term sustainability more than the same returns would later. While you're working, you can wait out a downturn. Once you're withdrawing, you may have to sell assets while prices are low.
| Market decline while still working | Market decline early in retirement | |
|---|---|---|
| Income source | Paychecks continue | Portfolio may need to fund spending |
| Need to sell investments | Usually not | Possibly, unless other sources are planned |
| Ability to wait for recovery | Generally higher | Depends on reserves and flexibility |
| Decision pressure | Lower | Higher, especially without a plan |
This isn't a failure of effort. It happens because investments, Social Security, taxes, healthcare, and spending usually get handled separately, often by different people. Your portfolio may be sensible on its own and still not be connected to the income plan it's supposed to support.
How to Prepare for a Market Drop Before You Retire
Step 1: Define What Your Retirement Spending Needs to Cover
Your downturn plan starts with knowing which spending can bend and which can't.
- Estimate annual spending in retirement.
- Separate essential costs (housing, food, insurance, healthcare) from discretionary ones (travel, gifts, projects).
- Identify large one-time expenses in the first five years.
- Discuss which tradeoffs you'd both accept.
Step 2: Map Your Income Sources Against That Spending
The more of your essential spending that predictable income sources cover, the less your portfolio has to carry during a downturn.
- List Social Security, pensions, military or government retirement, rental income, or planned part-time work.
- Evaluate Social Security claiming options for both spouses together.
- Calculate the gap your portfolio needs to fill each year.
- Plan for healthcare costs before Medicare eligibility at 65 if you retire earlier.
Step 3: Decide Where Early Withdrawals Will Come From
Know in advance which accounts and assets will fund your first several years of retirement, so you aren't deciding during a decline.
- Consider how much near-term spending to hold in lower-volatility assets.
- Review the order of withdrawals across taxable, tax-deferred, and Roth accounts.
- Understand how each source affects your taxes and healthcare premiums.
- Confirm your investment strategy matches your withdrawal timeline.
Step 4: Set Spending Adjustment Rules Ahead of Time
Adjustments you agree on before a downturn are easier to follow during one.
- Define which discretionary expenses you'd pause or reduce in a decline.
- Agree on what conditions would trigger those adjustments.
- Decide what would allow spending to return to normal.
Step 5: Stress-Test Your Retirement Date
If a decline happened the year before you planned to retire, what would you do? Decide that now, together.
- Run scenarios with a decline before, at, and after retirement.
- Discuss whether you'd delay, retire on schedule, or phase in part-time work.
- Make sure both spouses understand the plan and know where everything is.
Common Mistakes to Avoid
Quick Recap
- What happens if the market drops right before you retire depends mostly on how your withdrawals, income, and spending are coordinated, not on the decline alone.
- Sequence-of-returns risk matters most in the years just before and after retirement.
- Predictable income sources and flexible spending may reduce how much you need to sell from your portfolio during a decline.
- A written downturn plan made in advance helps both spouses act with a strategy instead of reacting to headlines.
Frequently Asked Questions
Should I move my investments to cash before I retire?
Not necessarily. Moving everything to cash may reduce your exposure to a decline, but it can create other risks, such as missing a recovery and losing purchasing power to inflation over a long retirement. Many people wanting to retire instead consider how much of their near-term spending to hold in lower-volatility assets, based on their income sources, spending needs, and comfort with risk.
What is sequence-of-returns risk?
Sequence-of-returns risk is the possibility that poor investment returns early in retirement, combined with ongoing withdrawals, may reduce a portfolio's long-term sustainability more than the same returns would later. It matters most in the years just before and after retirement, when withdrawals begin and the portfolio is often near its largest size.
Should I delay retirement if the market drops?
Sometimes, but not automatically. Delaying retirement can add income and give investments time to recover, but it also uses time you may not get back. A more useful approach is to decide in advance which conditions would lead you to delay, retire as planned, or adjust spending, so the decision isn't made under pressure.
When should I work with a financial planner instead of doing this myself?
Professional planning may be useful when your decisions are interconnected, difficult to reverse, or affect both spouses. Preparing for a downturn before retirement touches withdrawals, taxes, Social Security timing, healthcare, and investments all at once. If you're comfortable coordinating those yourself, you may not need help. If they feel disconnected, a planner can help organize them into one framework.
If you're approaching retirement and want to understand how your income, investments, taxes, healthcare, Social Security, and estate priorities fit together, schedule a Retirement Planning Conversation with Future Path Financial Planning. We'll determine whether the Retirement Clarity Sprint is appropriate for your situation.
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Important Disclosure: This article is for general informational and educational purposes only and is not personalized investment, tax, or legal advice. It does not consider your specific financial situation, objectives, or needs. Investing involves risk, including possible loss of principal. Tax and legal matters should be reviewed with your CPA or attorney. Future Path Financial Planning is a DBA of Legacy Growth Wealth Management LLC, a fee-only registered investment adviser registered in Florida. Advisory services are provided pursuant to an applicable advisory agreement and disclosure documents.