Should you Retire If the Market is Dropping?

I had a brief but fascinating discussion this weekend with someone who is planning on retiring in the next year.  The point was the person was actually considering pushing off his retirement by an extra year due to the market down turn last week.  I don’t know his exact exposure to the market, but I find this interesting because I can see both sides of the argument.

If he pushed it off another year, it would provide another year to finish saving up a pile of cash to provide a bit more cushion in case of a year of poor performance by the market.  It would also provide a more peace of mind since I can understand seeing a market shift down just before you retire could be very unsettling.

Yet if he just pulls the plug and he has done his homework in advance one year shouldn’t make or break your retirement if you have a large pool of funds already saved up.  After all you are going to face some down years in retirement with the market.  It is just unavoidable.  So if you hit in the start, what is the big deal?  As long as you have up to five years spending in cash you can let your investments ride out the storm and then start to build up your cash pile again with some profits afterwards.

So what is your thoughts?  What would you do if you were in this situation?

8 thoughts on “Should you Retire If the Market is Dropping?”

  1. If you’re a year from retirement, you shouldn’t have a significant amount of your money in equities, and because of that a bear market shouldn’t cause you any concern.

    If I was a year away from retirement, no more than 20-30% of my retirement cash would be invested in equities – the rest would be in fixed-income securities (bonds etc).

  2. According to Bernstein, having most of your retirement portfolio in fixed income increases the risk of not keeping up with inflation.

    The answer to your question depends on the amount of equity they have – most articles I’ve read about withdrawals in retirement agree that you need to be flexible with the withdrawals and be prepared to take out less money in a bear market. Bernstein specifically mentions that starting a retirement in a bear market is the worst thing you can do.

    He (and others) suggest that a retiree should have five years worth of expenses (adjust for inflation) in cash at all times which will allow them to get through a bear market.

  3. I would say it depends on how much he can save over the next year relative to the size of his total retirement portfolio. If this amount is small, why work the extra year? If this person had retired one year ago, would he consider going back to work today?

  4. One of the risks of retirement funded by a private portfolio is the risk of a severe Bear Market in the early years. His view may be justified. I continue to believe the risk of a severe, deep cutting Bear Market, is very high at this time.

  5. The sequence of returns matters a lot when you get to the withdrawal phase. The early years can make or break you.

    When you start withdrawing money and the markets are going down, you can take years off of your retirement funding ability. The long term difference of working/saving/not withdrawing for one more year are staggering.

  6. Well there’s no turning back for me, I’m retiring in 6 weeks–my replacement has already been hired.

    Hopefully 3 years’ worth of cash will be sufficient for this bear, or I guess I’ll be re-entering the work force in my retirement!


  7. Preet,

    Good point, it could cause issues, if he doesn’t have enough cash to wait things out.


    Three years should give you some time to wait things out. Another option is to pick up some part time work which you enjoy in those first three years and help make that money last a little longer. Best of luck.


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