How to Protect Yourself from Market Crashes in Retirement

What if the market crashes right after I retire? It's one of the most common worries we hear from people getting close to retirement. You've spent decades saving. You finally stop working. And then, right as you start living off your savings, the market drops. What are you supposed to do then?

It's a fair question, and the worry behind it is real. The good news is that it's also something you can plan for well before it ever happens.

Why the Timing of a Downturn Matters

Imagine two retirees, Mary and Linda. Both retire with the same $1,000,000, both take the same amount out each year to live on, and over the next 20 years, both earn the exact same average return. On paper, they should end up in the same place. They don't.

Mary retires into a strong market. Her savings keep growing in her early retirement years, even while she's taking money out. When a downturn finally hits a decade later, she has enough cushion that it barely affects her.

Linda retires right before a downturn. In those first few years, she's taking money out of savings that are already shrinking. To cover her bills, she has to sell investments while they're down. By the time the market recovers, she's sold off a much bigger piece of her savings, and there's far less left to benefit from the rebound.

Same average return. Same spending. Very different results. The only difference was timing. The industry has a name for this: sequence of returns risk. Put simply, it means the order in which good and bad years show up matters, especially in the first few years after you retire. While you're working and adding to your savings, a down market can even be an opportunity. Once you're living off your savings, a down market early on can do lasting damage if you're forced to sell at the wrong time.

That's the real risk. Not just that the market will drop, because at some point it will. It's being forced to sell while it's down.

Every Choice Carries Some Risk

When it comes to investing in retirement, there's no option that's completely free of risk. The real question is which risks you're taking, and how much of each.

On one end, you could keep all your money in cash at the bank. You'd never see your balance drop because of a bad year in the market. But you'd be taking a different risk: that your money doesn't grow fast enough to keep up with inflation. Prices rise every year. Over a retirement that could last 20 or 30 years, money that isn't growing buys less and less. You can run out of money not because of a crash, but because your savings simply didn't keep pace.

On the other end, you could put everything in aggressive investments. That gives your money the most room to grow, but it also leaves you exposed. Without enough diversification, a major downturn can take such a large bite out of your savings, right when you're depending on them, that they may never fully recover.

Neither extreme works well in retirement. The goal is to find the right balance between the two: enough growth to keep up with rising costs over a long retirement, and enough stability to get through the rough patches.

The Building Blocks: Stocks, Bonds, and Cash

Before we explain how we plan around this, it helps to know the three main types of investments we work with.

Stocks are ownership in a company. When you own a stock, you own a small piece of that business. As the company grows and does well, you do well too. Over long periods of time, stocks have historically offered the strongest growth. The trade-off is that they can go up and down a lot in the short run.

Bonds are essentially loans to a government or company that pay you interest. They tend to grow more slowly than stocks, but they're much more stable. In investing terms, they have less volatility, which just means fewer and smaller ups and downs along the way.

Cash is money in a savings account, money market, or similar place. It doesn't grow much, but its value doesn't swing with the market. It's there when you need it.

Each one has a different job. The key is giving each the right job based on when you'll actually need the money.

The Bucket Approach

Instead of treating your savings as one big pile that's fully exposed to the market at all times, we divide it into buckets based on when you'll need the money.

The short-term bucket holds cash for your near-term living expenses. This is the money you'll spend in the next year or two, and it's kept somewhere steady and easy to access, so a bad week in the market has no effect on it.

The medium-term bucket holds more stable investments, mostly bonds, for the money you'll need over the next several years. It's designed to hold up well when stocks are struggling, so it can keep refilling your cash bucket during a downturn.

The long-term bucket holds stocks for the money you won't need for many years. Because that money has time on its side, it can ride out the ups and downs and keep growing for the later years of your retirement.

When markets are doing well, we refill the shorter-term buckets from the growth in your long-term bucket. When markets are down, we leave your stocks alone and let you live off your cash and bonds while the market recovers.

Back to Linda

Think about Linda again. With a bucket approach in place, a downturn early in her retirement wouldn't force her to sell stocks at a loss to pay her bills. She'd be living off her cash and bonds, money set aside for exactly that situation, while her stocks had time to recover.

At Launch Wealth, we build your buckets around your specific spending needs and situation. We size them with the major market downturns of recent history in mind, so that if a similar downturn happens early in your retirement, you'd have enough in your cash and bond buckets to cover your spending without needing to sell stocks while they're down.

Peace of Mind When It Matters Most

The bucket approach makes sense on paper, but its biggest value may be how it helps you feel during a rough market.

Many of the most costly retirement mistakes aren't about picking the wrong investment. They're about fear. Selling everything at the bottom because the headlines are scary and it feels like the only way to stop the losses. When you know your next few years of spending aren't riding on the stock market, it becomes much easier to stay calm and stick with the plan.

The market will have bad years during your retirement. That part isn't in anyone's control. What we can control is making sure a bad year never forces you into a bad decision.

If you'd like to see how we build a plan like this with our clients, take a look at Our Process.

Disclaimer

This article is for educational purposes only and is not personalized investment, tax, or legal advice. Examples are hypothetical, and figures are based on current law, which may change. Investing involves risk, including possible loss of principal. Launch Wealth LLC is a registered investment adviser. Registration does not imply a certain level of skill or training. View our full disclaimers here.