What a 10% Market Drop Would Mean for Retirees Living on Withdrawals Right Now
Written by
Jordan Rosenfeld
Edited by
Molly Sullivan
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If you’ve got a large retirement nest egg, you might feel secure — unless the market is swinging wildly. A 10% market drop might not sound catastrophic but for retirees living on portfolio withdrawals right now, a pullback can carry different consequences.
Experts explained what impact such a drop would have on retirees who are currently living on their withdrawals.
How a 10% Market Drop Affects Retirement Withdrawals
A 10% decline does not hit every retiree the same way, according to Bill Kearney, chief investment strategist and co-founder of Crown Advisors, LLC. It depends on how the portfolio is built and how income is being distributed.
Kearney pointed to sequence-of-returns risk as the first issue to consider. “If your plan is highly sensitive to a 5% or 10% decline while you’re actively withdrawing income, that may signal the portfolio isn’t quite aligned with your true retirement risk profile,” he explained.
Early declines combined with withdrawals can permanently reduce the longevity of the portfolio if it isn’t properly structured.
Josh Katz, CPA and founder of Universal Tax Professionals, agreed, adding that a market drop of this size could force retirees to sell more shares to generate the same dollar amount for living expenses. “That compounds over time and can really damage the portfolio’s ability to recover.”
What Sequence-of-Returns Risk Really Means
Sequence-of-returns risk is really an issue of timing, namely that poor market returns early in retirement, especially while you’re withdrawing income, “can permanently damage your portfolio, increasing the chance that you outlive your money,” Kearney said.
Jay Zigmont, CFP and founder of Childfree Trust, added that it’s really the first five years after you retire that have the greatest impact on how much you can withdraw from your investments.
What Happens to the 4% Rule in a Downturn
Many retirees rely on the 4% withdrawal rule. But a 10% drop can quickly change the math. Kearney offered a clear example: In a portfolio of $2 million, for example, taking a 4% withdrawal is $80,000 per year. If your portfolio drops 10%, that $2 million portfolio is now $1.8 million. Your income immediately declines to $72,000 per year.
“To maintain your $80,000 income, you would need to increase your percentage of withdrawal to 4.4%,” Kearney said. “This could unknowingly open you up to an additional retirement risk — excess withdrawal risk.”
Katz warned that if you keep doing this because of market decline “you’re slowly eating yourself alive.”
When To Adjust Withdrawals
Not every 10% drop requires immediate cuts. Zigmont cautioned, “Retirees shouldn’t be reacting day to day to market fluctuations.” He recommended annual planning instead of emotional reactivity, such as taking out your spending money from your investments once a year. “You then get stability for a year.”
Kearney recommended clearly outlining “the rules of engagement for portfolio income planning” before the market drops for overall portfolio success and peace of mind.
Even cutting back 10% or 20% temporarily can make a huge difference long term, Katz said. “I tell clients to have flexible spending categories they can trim during downturns.”
The Role of Cash Reserves and Guaranteed Income
One of the strongest buffers against a downturn is liquidity in the form of emergency funds. Kearney recommended keeping up to two years of planned withdrawals in a “cash-alternative position,” explaining that it “prevents you from being forced to sell growth assets at depressed prices to generate income.”
Katz said even six months to one year’s worth of expenses kept in cash or short-term bonds can keep you from selling equities at a loss. “Let the market recover while you’re spending down the safe stuff.”
Guaranteed income also makes a difference. Katz called Social Security and pensions “lifesavers because they don’t drop when the market does.”
The Drop Isn’t the Crisis
A 10% market drop doesn’t automatically create a crisis for retirees, but it can if the portfolio wasn’t constructed with sequence risk and guardrails in mind, Kearney stressed.
For retirees living on withdrawals, a 10% decline is a stress test and the results depend entirely on how the plan was built before volatility arrived.
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