What If the Market Crashes When You’re 63? Managing Sequence-of-Returns Risk
If you’re nearing retirement, a major market downturn could permanently derail your plans. The five years before and after retirement, your “retirement red zone”, are the most vulnerable to sequence-of-returns risk, when early investment losses and withdrawals can shrink your portfolio beyond recovery. Historical crashes like 2008 (-57%) and 2020 (-34%) show that timing, not just average returns, determines retirement success. Evidence-based strategies can help you protect income and sustain your savings when markets inevitably fall again.
- Shift gradually to safety: Begin a glide path 5–10 years before retirement, moving from 80/20 to roughly 60/40 or 50/50 stock-bond allocation to reduce volatility exposure.
- Hold a 2–3 year cash buffer: Keep cash or short-term bonds to cover expenses during bear markets and avoid selling at a loss.
- Use a “bond tent” strategy: Lower equity exposure at retirement, then rebuild it in your 70s for growth as sequence risk declines.
- Stay flexible: Reduce discretionary withdrawals by 10–20% during market downturns to preserve principal.
- Delay Social Security: Each year you delay benefits past full retirement age increases payouts by 8%, reducing pressure on your portfolio when markets are weak.
You’ve spent decades building your retirement nest egg. You’re 63, planning to retire at 65, and your portfolio has grown substantially. Then one morning, headlines announce a market crash. Over the following months, your portfolio value plunges, 40%, 50%, perhaps more, and your retirement dreams suddenly feel at risk.
This isn’t just a hypothetical scenario. It has happened before, and it will happen again. The S&P 500 fell about 57% between 2007 and 2009, around 49% during the 1973–74 recession, and nearly 34% in just five weeks during the 2020 COVID-19 crash. These declines show how vulnerable retirees can be to what’s known as sequence-of-returns risk, the danger of major losses right as you begin drawing income from your savings. The question isn’t whether markets will crash, but how you’ll protect yourself when you’re most exposed.
The Hidden Danger: Why Timing Matters More Than You Think
Most investors understand that markets go up and down. What fewer realize is that the timing of those ups and downs can matter more than the average return itself, especially in the years immediately before and after retirement.
This phenomenon, known as sequence-of-returns risk, is one of the most significant threats to retirement security. Two investors with identical average returns over 30 years can end up with dramatically different outcomes based solely on when those returns occur.
Consider two retirees, each starting with $1 million and withdrawing $50,000 annually. If Retiree A experiences strong market returns in the first decade and weaker returns later, their portfolio could last 30 years or more. But if Retiree B faces poor returns early and strong ones later, their portfolio might be depleted in 20 years or less. The averages are the same, but the timing makes all the difference.
Source: Charles Schwab
The Historical Reality: It Has Happened Before
Market crashes aren’t rare events. They’re recurring features of financial markets:
- 1929: The Dow Jones lost about 89% of its value from its September 1929 peak to July 1932.
- 1973–1974: The S&P 500 fell nearly 48%, with a recovery that took several years.
- 1987: On Black Monday, October 19, 1987, the Dow plunged 22.6% in a single day.
- 2000–2002: The Nasdaq Composite collapsed about 78% from its March 2000 peak to October 2002.
- 2007–2009: The S&P 500 dropped around 57% during the global financial crisis.
- 2020: A rapid 34% decline occurred during the COVID-19 shock, though recovery came within months.
If you had retired at the start of the 2007–2009 financial crisis with a heavily equity-weighted portfolio, the impact on your retirement security would have been severe. Many near-retirees delayed retirement by years, and some never retired as planned.
Why the Late 50s to Early 60s Is a Dangerous Age
The years immediately before retirement are often called the “retirement red zone” – a period of heightened financial vulnerability. By this stage, your nest egg is typically at its peak, but your time horizon for recovery has shortened dramatically.
If a market downturn strikes at age 63, you likely won’t have decades left to recover as a 35-year-old would. A 50% portfolio decline requires a 100% gain to break even, a mathematical reality that can take several years. After the 2008 financial crisis for instance, the S&P 500 took about five years (March 2009 – March 2013) to regain its pre-crash level.
The risk is compounded when you’re already drawing income from your portfolio. Every withdrawal during a bear market locks in losses and reduces the capital available for the eventual rebound, a phenomenon known as sequence-of-returns risk.
Extensive research, including studies from the Center for Retirement Research at Boston College and the Society of Actuaries confirms that negative returns in the five years before and after retirement have the greatest long-term impact on portfolio longevity. Losses in this window can permanently reduce sustainable withdrawal rates, even if markets later recover.
The Compounding Effect of Withdrawals
What makes pre-retirement and early-retirement market crashes particularly dangerous is how portfolio withdrawals amplify investment losses, a phenomenon well-documented in retirement research. During your accumulation years, downturns can actually be beneficial because new contributions buy assets at lower prices, improving long-term returns.
However, once withdrawals begin, typically in your 60s, that same volatility becomes destructive. When markets fall, you must sell more shares to produce the same level of income, permanently shrinking the portion of your portfolio that can participate in the next recovery. This process is known as the sequence-of-returns risk, and in practical terms, it acts as reverse dollar-cost averaging, selling low instead of buying low.
A 2013 study from the Center for Retirement Research at Boston College and analyses from Morningstar confirm that poor returns early in retirement can reduce portfolio longevity by 10 years or more, even if average long-term returns are identical. That’s why financial planners emphasize maintaining a cash buffer or short-term bond ladder to avoid forced selling during downturns.
What You Can Do: Evidence-Based Strategies
The good news is that financial planners and researchers have developed proven strategies to mitigate sequence-of-returns risk. Here’s what the evidence supports:
1. Implement a Glide Path Strategy
Target-date funds pioneered the idea of automatically reducing stock exposure as retirement approaches. The principle is sound: gradually shift from growth-oriented assets toward more conservative holdings in the years before retirement.
A common approach targets a 60/40 or 50/50 stock-to-bond mix by retirement age. Some research suggests going even more conservative (around 40/60) in the five years before and after retirement, then modestly increasing equity exposure again once sequence risk declines. The key is timing. If you’re 63 and still 90% in equities, you’re carrying major sequence risk. Begin this transition five to ten years before your planned retirement date.
2. Build a Cash Buffer
Maintaining two to three years of living expenses in cash or short-term bonds prevents forced selling during market downturns. This “bucket” strategy gives you a liquidity cushion while waiting for markets to recover. Historically, most major corrections have recovered within three to five years, making this approach a realistic buffer against early-retirement losses.
3. Consider a Bond Tent Strategy
The “bond tent” strategy reduces equity exposure to its lowest point at retirement, then gradually increases it in the following decade. This protects against early sequence risk while maintaining long-term growth potential. It recognizes that a 70-year-old retiree still needs portfolio growth, but a 65-year-old beginning withdrawals needs protection first.
4. Maintain Flexibility in Spending
Research shows that flexible withdrawal rules significantly improve portfolio longevity. Reducing discretionary spending by even 10–20% during down markets helps preserve capital.
This doesn’t mean cutting essentials like housing or healthcare. It means temporarily trimming non-essentials such as travel or entertainment to ease withdrawal pressure. Flexibility itself is a form of insurance.
5. Delay Retirement or Work Part-Time
Even a two-year delay in retirement can dramatically improve outcomes during bear markets. Continuing to earn income gives your portfolio recovery time while extending compounding.
Research from the Employee Benefit Research Institute shows that partial or delayed retirement is one of the most effective ways to offset poor market timing.
6. Delay Social Security
According to the Social Security Administration, delaying benefits between full retirement age and 70 increases payments by 8% per year. Waiting until age 70 boosts lifetime benefits by up to 32% compared to claiming early. This larger guaranteed income floor reduces your need for portfolio withdrawals, especially valuable if a downturn hits near retirement.
The Psychological Dimension
Beyond the mathematics, sequence-of-returns risk has a powerful psychological dimension. Watching your portfolio drop 40–50% just as you’re about to retire can trigger panic selling, turning a temporary market decline into permanent losses. Research on behavioral finance shows that loss aversion often causes investors to sell near market bottoms and miss the recovery, compounding long-term damage.
This is why having a plan in place before a crash occurs is crucial. When you’ve already established your glide path, built a cash buffer, and set flexible withdrawal rules, you’re less likely to make emotional decisions during market turbulence.
Many financial planners recommend stress-testing your retirement plan against historical crashes. Run the numbers: what would happen to your portfolio if another 2008-style crisis occurred next year? If the results threaten your financial security, it’s a clear signal to adjust your strategy now.
Starting Your De-Risking Plan Today
If you’re in your late 50s or early 60s and still heavily invested in equities, here’s a practical, evidence-based starting point drawn from research on glide path strategies and retirement transition planning:
Year 1: Assess your current allocation and target retirement date. Estimate what your allocation should be using your chosen glide path model (for example, transitioning from 80/20 to 60/40 equity-bond mix). Begin building a cash buffer, typically 2–3 years of expenses, by directing new contributions and dividends into money market funds or short-term bonds.
Years 2–3: Gradually rebalance toward your target allocation. Avoid drastic one-time changes that could trigger capital gains taxes or miss potential market rebounds. Instead, use ongoing contributions, opportunistic rebalancing, and tax-loss harvesting to shift your portfolio smoothly over two to three years.
Years 4–5: Fine-tune your allocation and confirm that your cash reserve is fully funded. Review your withdrawal strategy, spending flexibility, and Social Security claiming options. This is also the time to align income sources, such as pensions or annuities, with expected expenses.
Retirement year and beyond: Continue monitoring your plan, but avoid emotional or short-term reactions to market movements. As sequence-of-returns risk declines with age and withdrawals stabilize, you can gradually increase equity exposure again in your 70s to preserve long-term growth potential.
The Bottom Line
The fear of a market crash at retirement age is not irrational – it’s a legitimate risk backed by decades of market history and retirement research. Sequence-of-returns risk is real, and it has derailed countless retirement plans.
But fear doesn’t have to lead to paralysis. The same research that identified the problem has also provided evidence-based solutions. By implementing a thoughtful glide path strategy, building adequate cash reserves, maintaining spending flexibility, and making informed decisions about retirement timing and Social Security, you can substantially reduce your vulnerability to market crashes in the critical years around retirement.
The market will crash again. We don’t know when, but we know it will happen (here are the metrics to watch). The question is whether it will catch you unprepared at 63, or whether you’ll have already built the protections that will allow you to weather the storm and enjoy the retirement you’ve worked decades to achieve. Start planning now. Your 63-year-old self will thank you.
This article is part of Mooloo’s Retirement & Long-Term Planning Hub, covering retirement income, Social Security decisions, investment risk, healthcare costs, and long-term financial security.
