What Happens if Markets Crash Just as You're About to Retire?

Four straight gains. A 45-day ceasefire is on the table. Tuesday's deadline is today.

The quick scan: Markets rose for a fourth consecutive session as ceasefire reports continued to emerge, a potential 45-day truce framework, and Reuters separately reporting a plan for an immediate ceasefire and reopening of the Strait of Hormuz. At the same time, Trump posted a Truth Social warning Sunday that Tuesday would be "Power Plant Day and Bridge Day" if the strait isn't opened. Markets chose to price the diplomacy. The Dow closed at a three-week high. The Tuesday deadline Trump set is today.

S&P 500: +0.44% to 6,611.83 – fourth straight gain; up more than 4% from the five-week-low close of 6,343 reached just two weeks ago
Dow Jones: +0.36% to 46,669.88 – three-week high; Boeing, Cisco and American Express led gains
NASDAQ: +0.54% to 21,996.34 – tech recovered further; Alphabet and Amazon each gained more than 1%, Micron surged 3.2%; Tesla fell 2.2%.

What's driving it: Two competing narratives ran simultaneously on Monday. The ceasefire framework reports gave markets a reason to rise – a 45-day truce would provide meaningful relief to oil markets and reduce the stagflation risk that has weighed on equities since February. But Trump's Sunday post – threatening to strike Iran's power plants and bridges if the Strait of Hormuz isn't opened by Tuesday – kept VIX elevated at 24 despite the gains, a signal that traders are not fully convinced the optimism will hold. Friday’s strong March jobs report (178,000 vs ~59,000 expected) while markets were closed also supported the session – evidence that the US labour market is absorbing the war's economic impact better than feared.

Bottom line: Four winning sessions after five losing weeks. The market is pricing a resolution that hasn't happened yet. Tuesday is the test – if Trump follows through on his threat, the recovery reverses sharply. If a ceasefire framework emerges, the rally likely continues. For L-Plate Retirees reading this on Tuesday morning: the answer will probably be clearer by the time you finish your coffee. Which is exactly the kind of volatility that today's article is designed for.

The Retirement Timing Problem Nobody Likes to Think About

The scoop: Timing, in retirement planning, is almost everything.

A market crash when you're 35 is, in practical terms, an opportunity. You have decades for the portfolio to recover, and every dollar you invest during the downturn buys more than it would have before. A market crash at 65, two weeks before you stop working? That's a different category of problem entirely.

Writing in the Motley Fool, personal finance journalist Maurie Backman names this one of the more uncomfortable retirement scenarios to plan for – and one of the more important. Because unlike most risks that retirement planning addresses, this one arrives at the exact moment when you have the least ability to wait it out.

Why the timing matters so much.

The reason a pre-retirement crash is so dangerous isn't the crash itself – it's what happens next. The moment you retire, you shift from accumulation mode to withdrawal mode. Instead of adding to your portfolio, you're taking from it.

If you start withdrawing from a portfolio that has just dropped 20–30%, two things happen simultaneously. First, you're selling assets at depressed prices to fund your living costs, locking in losses that would otherwise have been temporary. Second, you're reducing the number of units in your portfolio precisely when each unit needs to be working hardest. The mathematical consequence of this combination – known as sequence-of-returns risk – can be permanent. Unlike a working-age investor who can simply wait, a retiree taking withdrawals doesn't have that option.

A crash a couple of months after you've retired is difficult. A crash on the eve of retirement is arguably worse, because you haven't yet built the structures – cash buffers, flexible withdrawal strategies – that a well-prepared retiree would already have in place.

What Backman plans to do about it.

Backman is transparent about her own position: she's approaching retirement and has thought carefully about what a badly timed downturn would mean for her household. Her plan has three components.

The first is to delay retirement if possible. If the market crashes before she makes retirement official, her first instinct would be to extend her career – to keep building, keep accumulating, and wait for conditions to improve before making the transition. She acknowledges this isn't always possible: her husband's job is the kind that doesn't easily convert to part-time, and there's no guarantee that either of them would be able to keep working longer than planned. But it's the first option to reach for, because it solves the timing problem at its root rather than managing its consequences.

The second is flexibility on retirement spending. Backman and her husband have a vision for what retirement looks like – in their case, it involves RV travel. But they're clear-eyed about the fact that that vision is adjustable. A crash would mean scaling back: cheap campgrounds instead of luxury RV parks, groceries instead of restaurants, fewer of the discretionary expenses that make a retirement comfortable rather than merely sustainable. This isn't failure – it's what good planning looks like when the original plan hits friction.

The third is cash. Backman mentions stockpiling cash as part of her strategy – building a cushion that allows the portfolio to remain untouched during a downturn, because it's the act of selling into a falling market that converts temporary losses into permanent ones.

The sequence-of-returns problem in plain terms.

The maths behind sequence-of-returns risk is one of those things that sounds abstract until you run the numbers.

Consider two retirees who each start with $500,000 and withdraw $30,000 per year. Retiree A experiences strong early returns followed by poor ones. Retiree B experiences poor early returns followed by strong ones. Even if the average annual return is identical across both sequences, Retiree B ends up with dramatically less money – or runs out entirely – while Retiree A's portfolio survives. The order of returns matters as much as the average.

This is why the standard advice to "just stay invested" and "ignore short-term volatility" applies cleanly to accumulation but needs nuance for people in or approaching the withdrawal phase. Staying invested is still right. But having a plan to avoid forced selling during a downturn – the cash buffer, the flexible withdrawal rate, the willingness to delay if possible – is what separates a comfortable retirement from a financially stressed one.

The broader principle.

Backman's article is personal and specific, but the underlying message applies to anyone approaching retirement in a volatile market – which, given what markets have done over the past six weeks, describes most of our readers.

The market correction we've been living through since February is, by definition, recoverable. The S&P 500 has never permanently failed to recover from a correction. What isn't automatically recoverable is the damage done by withdrawing from a portfolio at the bottom of one, particularly in the early years of retirement when that damage compounds forward across decades.

The people best protected from that outcome are the ones who thought about it before it arrived – who have a cash buffer, a flexible spending plan, and a clear sense of what they'd do if their timeline needed to shift.

As Backman's plan demonstrates, you don't need certainty about when the market will move. You need a framework for what you'll do when it does.

Actionable takeaways for L-Plate Retirees:

• Know your sequence-of-returns exposure. If you're within five years of retirement, you are in the highest-risk window for sequence-of-returns damage. A significant market decline during this period, combined with early withdrawals, can permanently reduce the sustainability of your portfolio. This isn't a reason to panic – it's a reason to have a plan.

• Build your cash buffer before you need it. The standard recommendation is two years of living expenses in cash or near-cash – enough to avoid selling investments during a downturn. If you're approaching retirement without this buffer, building it is more urgent than optimising investment returns right now.

• Have an explicit "what if" plan. Backman's approach – delay if possible, cut spending if not, maintain a cash cushion – is a useful template. The specific answers will differ for everyone, but the discipline of writing out your plan before markets force the decision is what matters.

• Know which expenses are discretionary. In a crash scenario, the ability to cut spending quickly is what buys time for the portfolio to recover. If you haven't identified the difference between your essential and discretionary retirement expenses, now is the time. The gap between those two numbers is your flexibility.

• Consider whether your retirement date is fixed or flexible. Some people have fixed retirement dates – contractual, health-related, or otherwise. Others have more room than they realise. If yours is flexible, treat that flexibility as an asset. It is one.

• The withdrawal rate is not sacred. Many retirees plan around the 4% rule as if it were fixed. But reducing withdrawals by 10–20% during a downturn year – pulling $36,000 instead of $40,000 from a $1 million portfolio, for example – can meaningfully reduce the long-term risk of depleting savings. Flexibility in the first few years of retirement matters more than most people realise.

Your Turn:
If the market dropped 25% the month before you planned to retire, what would you actually do – delay, adjust spending, or proceed as planned? Have you ever thought through that scenario explicitly?
The cash buffer recommendation – two years of living expenses outside of your investment portfolio – is standard advice that many people haven't implemented. Where are you on that, and if you're not there, what's the plan?
Backman's plan involves flexibility on lifestyle – luxury RV parks become basic campgrounds if the market calls for it. How flexible is your retirement vision, and have you and your partner talked about what "scaling back" would look like in practice?

👉 Hit reply and share your thoughts – your answers could inspire fellow readers in future issues.

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