Here's a question most pre-retirees don't ask until it's almost too late: What if I retire right into a bad market?

It sounds simple. Markets go down, markets come back up. You've probably survived a few downturns in your career. Why would retirement be any different?

It's different because of one thing: you're no longer adding to your accounts. You're taking money out.

That shift — from accumulating to withdrawing — changes everything about how market losses affect you. And if you happen to retire in a year when the market drops 10% to 20%, the damage can follow you for the rest of your life. This concept is called sequence of returns risk, and it's one of the most overlooked threats to a comfortable retirement.

The Same Average Return, Completely Different Outcome

Here's an example that makes this real. Imagine two people — let's call them Dave and Carol. Both retire with $1,000,000. Both withdraw $50,000 per year. And over 20 years, both experience the exact same average market return of 5% annually. The only difference? The order in which those returns arrive.

Same average return. Same withdrawals. Completely different outcome. The difference isn't how much the market earned — it's when.

Why Early Losses Hit So Hard

When you're still working and contributing to your 401(k), a market drop is actually an opportunity. You're buying shares at a discount, and when the market recovers, you've picked up extra growth. Dollar-cost averaging works in your favor.

Retirement flips that on its head. Now you're selling shares — pulling money out — at those same depressed prices. You're locking in those losses. And because you're selling more shares to generate the same income when prices are low, you have fewer shares left to benefit when the market eventually recovers.

Think of it this way: if your portfolio drops 30% in year one of retirement, you don't just need the market to go up 30% to get back to even. You need it to go up 43% just to recover what you lost. And you've been withdrawing the whole time it was trying to climb back.

Who Is Most at Risk?

Sequence of returns risk is most dangerous during what we call the "retirement red zone" — roughly five years before and five years after your retirement date. This is the window where a bad market does the most damage.

If you're 10+ years from retirement, you have time. Markets will recover, and you're still in accumulation mode. If you're 20+ years into retirement, you've likely built a buffer of gains. But if you're right on the doorstep of retirement and the market drops sharply, you're exposed in the worst possible way.

What You Can Do About It

The good news: this is a known, manageable risk. It's not about predicting the market — nobody can do that. It's about structuring your retirement income so a bad year doesn't derail the entire plan.

• 1
  Build a cash or short-term reserve ("the buffer bucket")

  Keep 1–2 years of living expenses in a money market or low-volatility assets. If the market drops early in retirement, you pull from this bucket — not your investment portfolio. That gives your investments time to recover without selling at a loss.

• 2
  Create guaranteed income floors with annuities or Social Security

  If a portion of your monthly expenses is covered by income that doesn't depend on the market — Social Security, a pension, or an income annuity — you reduce your need to sell investments during downturns. The smaller your required withdrawals, the less damage a bad sequence can do.

• 3
  Be strategic about Social Security timing

  Delaying Social Security to 67 or 70 increases your guaranteed monthly benefit — often significantly. That higher guaranteed income means you need less from your portfolio each month, which reduces your sequence of returns exposure throughout retirement.

• 4
  Adjust withdrawals dynamically in bad years

  Rather than withdrawing a fixed dollar amount every year regardless of market conditions, consider a flexible withdrawal strategy. If the market drops 20%, can you pull less from the portfolio for 12–18 months? Even modest reductions during a downturn can dramatically extend how long your money lasts.

• 5
  Reposition risk exposure as you approach retirement

  You don't need to go fully conservative — that creates its own long-term risk. But reducing your equity exposure in the two to three years before retirement, and building it back gradually after you've established income streams, can meaningfully reduce your red zone vulnerability.

The Bottom Line

A market drop at retirement isn't just a bad year. Without the right structure in place, it can permanently alter the trajectory of your retirement income — forcing you to spend less, return to work, or watch your nest egg erode faster than you ever expected.

The people who come through a bad retirement market without lasting damage are rarely the ones who predicted it. They're the ones who planned for it before it happened — with income guarantees, cash reserves, and a withdrawal strategy flexible enough to bend without breaking.

Retirement income planning isn't just about how much you've saved. It's about how that money is structured to hold up under real-world conditions — including the kind of market volatility we've seen multiple times in the last 25 years alone.

If you're within five to ten years of retirement, now is exactly the right time to stress-test your plan.