12 min read • about 13 hours ago
This article has a ready-to-run scenario — apply it to your own plan in one tap.
A market decline is never comfortable.
But a major decline right after retirement can be especially damaging.
Why?
Because you may be doing two things at the same time:
That combination can leave fewer assets invested when markets eventually recover.
This is called sequence-of-returns risk.
And it is one of the most important risks to test before retiring.
Michael is 62 and ready to retire.
| Item | Amount |
|---|---|
| Investments | $1,000,000 |
| Retirement age | 62 |
| Annual spending | $70,000 |
| Social Security | Starts at 67 |
| Mortgage | Paid off |
| Cash reserve | $70,000 |
On paper, Michael appears ready.
But there is one thing he cannot control:
What happens to the market during his first few years of retirement?
Michael could experience three very different beginnings to retirement.
| Path | What Happens |
|---|---|
| Normal Markets | Portfolio experiences normal ups and downs |
| Early Crash | Market falls sharply soon after retirement |
| Early Crash + Flexible Spending | Market falls, but Michael temporarily reduces optional spending |
The long-term difference can be significant.
Michael retires with $1 million.
He begins taking withdrawals.
Markets fluctuate, but he avoids a major decline during the first few years.
His investments remain exposed to future growth while he gradually draws income.
This is the retirement path most basic calculators implicitly make look easy.
But markets do not always cooperate.
Now imagine Michael retires and markets fall sharply during his first year.
His $1 million portfolio falls approximately 20%.
That leaves:
$800,000
But Michael still needs money for:
If he then withdraws another $60,000 from the portfolio, he is left with roughly:
$740,000
before considering taxes, later market movement, or other income.
Now the portfolio must gain approximately 35% just to move from $740,000 back to $1 million.
That is the problem.
The issue is not simply:
The market fell.
It is:
The market fell while Michael was withdrawing money.
See how an early market decline changes your own retirement plan.
Compare:
Suppose Michael experiences the same market decline at age 75 instead of 62.
By then:
Same market decline.
Different timing.
Different retirement outcome.
That is why average investment returns do not tell the entire story.
Imagine two retirees.
Both average similar long-term investment returns.
Poor returns happen during the first few years of retirement.
Poor returns happen much later.
Retiree A may end up with substantially less money because withdrawals occurred while investments were depressed.
The order of returns matters once withdrawals begin.
The answer is not trying to guess when the next crash will happen.
No one reliably knows.
The better approach is building a retirement plan that does not require perfect markets.
That may include:
The goal is resilience.
Not prediction.
Now imagine the market falls 20%, but Michael does not continue spending exactly as planned.
His normal annual spending is:
$70,000
During the downturn, he temporarily reduces spending to:
$60,000
He keeps paying for everything essential.
He temporarily reduces:
That $10,000 reduction means less money needs to be withdrawn while the portfolio is down.
Small temporary changes can have a meaningful long-term effect.
Before retiring, divide your spending into two groups.
| Essential Spending | Flexible Spending |
|---|---|
| Housing | Travel |
| Groceries | Entertainment |
| Healthcare | New vehicles |
| Insurance | Major gifts |
| Utilities | Home upgrades |
| Taxes | Luxury purchases |
The goal is not to permanently reduce your lifestyle.
It is knowing:
What could I temporarily reduce if markets fall?
Nestly Lab currently supports the market-crash scenario directly.
After applying it, temporarily lower your retirement spending in the Lab and compare the result with the original crash scenario.
Start with:
Then compare:
Normal spending
versus
10%–15% lower discretionary spending during the downturn
Watch what changes in:
This is one of the most useful stress tests an early retiree can run.
Michael does not need five years of spending sitting entirely in cash.
But he does need to understand where the first several years of retirement income will come from.
A simple retirement safety plan might look like this:
| Item | Example |
|---|---|
| Essential spending | $50,000/year |
| Flexible spending | $20,000/year |
| Cash reserve | $70,000 |
| Social Security | Starts at 67 |
| Mortgage | None |
Then ask:
If stocks fall 20% tomorrow, where does next year's spending come from?
If the only answer is:
Sell more stocks.
the plan deserves another stress test.
Run a simpler stress test against your current savings.
This helps answer:
If my portfolio were suddenly worth 20% less, would I still feel ready to retire?
There is no single cash-reserve number that works for everyone.
The right amount depends on:
The goal is not to move everything into cash.
Too much cash can reduce long-term growth and lose purchasing power to inflation.
The goal is to make sure near-term spending does not depend entirely on selling investments during a downturn.
Michael could think about retirement money in three groups.
| Bucket | Purpose |
|---|---|
| Near-term | Cash and short-term spending needs |
| Mid-term | More stable investments for the next several years |
| Long-term | Growth assets for later retirement |
This is not a required portfolio strategy.
It is simply a useful way to ask:
Which money might I need soon, and which money can remain invested for years?
Michael spends $70,000 per year.
His Social Security begins at 67.
He has $70,000 in cash reserves.
That means his cash reserve covers roughly one year of his planned spending.
But he may not need the entire $70,000 from investments every year.
His actual need could change based on:
The important point is flexibility.
Sometimes the best defense against sequence risk happens before retirement begins.
Imagine Michael is 60 instead of 62.
Markets fall sharply.
He has two choices:
He begins withdrawals while the portfolio is down.
He may:
Working longer is not always necessary.
But it is one of the most powerful levers available to someone close to retirement.
See how delaying retirement by two years changes your ability to handle an early market decline.
Compare:
A bad market can create emotional pressure.
Avoid making the situation worse.
Selling after a large decline can turn temporary losses into permanent ones.
Taking much more investment risk to "make the money back" can create even larger losses.
Retirement may last 25, 30, or 40 years.
Long-term assets may still need growth.
Continuing every optional expense exactly as planned may force larger withdrawals when markets are weak.
Some downturns recover quickly.
Others take years.
Your retirement plan should be able to handle uncertainty.
This is the time to stress-test your plan.
Ask:
The closer retirement gets, the more important these questions become.
Before retiring, make sure you know the answers to these four questions.
Identify essential expenses.
Separate flexible spending.
Know your cash, income, and withdrawal sources.
Decide in advance whether you would:
Making these decisions before a crash is much easier than making them during one.
The key difference is not whether the market eventually recovers.
It is how many assets remain invested when the recovery begins.
| Scenario | Main Risk |
|---|---|
| Normal Markets | Regular retirement uncertainty |
| Early 20% Decline | Withdrawals while assets are depressed |
| Early Decline + Flexible Spending | Lower withdrawals during the downturn |
| Delay Retirement | Fewer early withdrawals and more time to recover |
This is why retirement planning should compare multiple paths.
Sequence-of-returns risk does not mean:
It means:
The combination of withdrawals and poor early returns deserves special attention.
A good retirement plan manages that risk without trying to eliminate every market fluctuation.
Nestly Lab lets you stress-test retirement instead of assuming markets behave normally.
You can compare:
Instead of asking:
"Will the market crash after I retire?"
ask:
"What happens to my retirement if it does?"
That is a question you can actually plan for.
You cannot control when markets fall.
You can control how dependent your retirement is on perfect timing.
The strongest retirement plan is not the one that assumes nothing goes wrong.
It is the one that still works when something does.
Important Disclaimer: This article is for educational purposes only and is not individualized investment, tax, legal, or retirement advice. Investment values can rise or fall, and past market recoveries do not guarantee future results. Retirement outcomes depend on spending, taxes, healthcare costs, inflation, Social Security, longevity, and other personal factors. Consider your complete financial situation and consult qualified professionals before making major retirement or investment decisions.
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