"Stay the course." "Ignore the noise." "Focus on the long term."
These are the phrases that experts often repeat during turbulent times like these when stock prices are shaky or dropping. The advice was especially relevant this past Thursday when the S&P 500 dipped nearly 5 percent and again on Friday with a 6 percent drop.
For most people, this advice is sound because no one can predict with certainty where the market or the economy will land this year. Missing out on stock gains, even for a short period, can impact retirement savings. Historically, over long stretches of 10 to 20 years or more, stocks have consistently rebounded after downturns, leaving steadfast investors with far greater balances than they had before the volatility.
But what if you can’t afford to wait a decade or more for a recovery?
For those planning to retire in the near future or those who have just stepped into retirement, today’s financial climate can be precarious. If you’re still working, a recession might force an earlier-than-planned retirement, shortening your savings timeline and extending the period during which you’ll rely on those savings. For those poised to retire soon or who have recently done so, a steep drop in stock prices increases the risk of depleting savings prematurely.
"The performance of the market and the economy in those years around retirement is disproportionately critical to the success of your entire retirement plan," noted Wade Pfau, a professor at the American College of Financial Services and author of the Retirement Planning Guidebook.
Financial experts label this period—roughly the five years before or after retirement—as the retirement danger zone, urging proactive measures to mitigate risks. Here are five steps they recommend taking now.
Build a Cash Cushion
When stock prices fall just as you begin to withdraw funds for living expenses, you need to sell more shares to meet the same spending needs. This reduces the amount left to grow once the market rebounds.
"It can dig a hole from which your retirement account may not recover," Pfau warns.
Imagine two new retirees each with savings of $1 million. Both start by withdrawing 4 percent annually (adjusting for inflation thereafter) to assist with retirement expenses. Over the years, they average a 5 percent return on their investments, despite year-to-year fluctuations. The difference? Retiree A enjoys a banner year with a 20 percent gain in Year 1, while Retiree B faces a tough start with a 20 percent loss.
The outcome? After 30 years, Retiree A ends up with more money than they started with, a total of $1.6 million according to an analysis by JP Morgan Asset Management. Retiree B, having less money available for future growth, runs out of funds after about 22 years.
To avoid Retiree B’s plight, financial advisers suggest investing enough in stable cash investments, such as money market funds and short-term Treasury securities, to cover what you plan to withdraw during your first two or three retirement years. Since you can’t predict the perfect time to sell, gradually shift what you’ll need from stocks to cash in equal portions over the coming months, advises Mark Whitaker, founder of Retirement Advice, a financial planning firm in Provo, Utah.
It’s also wise to identify other income avenues you can tap into if needed, such as annuities, a home equity line of credit, or even a reverse mortgage if you have substantial home equity.
A bonus of this approach is that "it helps people emotionally detach from what’s happening with the market," Whitaker says. "It’s like, okay, the money I need to live initially is safe, and my retirement plan doesn’t hinge on what the S&P does this year."
Tweak Your Mix (A Little)
You can also buffer against retirement account losses by allocating more assets to bonds, which have historically suffered far less than stocks in recessions. This becomes especially significant if you haven’t rebalanced your portfolio after the substantial gains of 2023 and 2024 when the S&P 500 rose 26 percent and 25 percent, respectively.
Consider aiming for enough in bonds and cash to cover your retirement withdrawals for five to seven years, suggests Clint Haynes, a retirement transition specialist in Lee’s Summit, Mo., and author of the book, "Retirement the Right Way."
But don’t go overboard, he warns. You still need to keep a substantial chunk of your savings in stocks—perhaps between 50 and 70 percent—to counteract another major financial risk for retirees: inflation. Over time, only stocks have dramatically outpaced rising consumer prices, historically posting average annual gains of 10 percent, more than double bonds’ and real estate’s returns, and triple those of cash investments.
"Inflation is a slow drip, like boiling a frog: the impact creeps up on you, but when it strikes, it feels unpleasant," Haynes comments.
Don’t be fooled into thinking you can exit stocks now and re-enter once the market stabilizes. Historically, gains have often come in unpredictable bursts, with the largest upswing days occurring just after the worst downturns. Missing out on the top 10 days over the 20 years from 2005 to 2024 would have slashed your profits by over 40 percent, according to JP Morgan; missing 30 of the top days across roughly 5,000 trading days in that span would have left you in the red after inflation.
Adjust Your Spending
Cutting back on your expenses, even for a while, can also help stretch your dollars further.
If you’re still employed, every dollar you don’t spend is one you can allocate to save, bolstering your preparation against a recession or market downturn. If you’re retired, every dollar saved is one less you need to withdraw when stock prices dip.
Evaluate your discretionary spending and see where you can make strategic cuts. "If you’ve budgeted $5,000 or $10,000 for travel, maybe now isn’t the time for an extravagant trip, or if you’re giving gifts to your children or grandchildren, dial it back a bit," suggests Lazetta Rainey Braxton, a financial planner and founder of Real Wealth Coterie in New Haven, Connecticut.
Or take a more systematic approach. Instead of adhering to the standard 4 percent withdrawal rate from your retirement account and adjusting it annually for inflation, consider forgoing the inflation hike when stocks are down, says Pfau. Alternatively, install “guardrails,” like limiting withdrawals to, say, 3 percent during poor market years, but taking out potentially 5 percent when the market is on an upswing.
Have a Plan B and C
Being proactive and adaptable to shifting economic conditions can also ease the emotional burden of financial worry in the early retirement years, asserts Teresa Amabile, a psychologist and emerita professor at Harvard Business School, and coauthor of "Retiring: Creating a Life That Works for You."
"In the face of uncertain markets and a wavering economy, you can’t help but feel some anxiety, but our research found that making adjustments and practicing adaptability to unforeseen circumstances can help alleviate those concerns," Amabile states.
According to Amabile, a useful exercise is thinking of three different retirement lifestyle scenarios: your ideal, a scaled-back version that might be more financially realistic, and an even more pared-down option if economic conditions leave you feeling more restricted.
Perhaps, for example, you envisioned buying a second home in a warm locale to escape winter months. A scaled-back version might entail renting a cottage by the beach for a month or two in the winter chill; the third option could involve taking shorter winter vacations or even downsizing your primary home to free up more funds for travel.
"Plan scenarios that remain appealing," Amabile advises. "Recognizing the range of enjoyable options available to you is key."
Work a Little Longer
If you’re still working, postponing your retirement by even a little can give you more time to save and shorten the number of years your savings need to last.
"Working longer is a tremendously powerful way to enhance your retirement finances and get a spending plan back on track," Pfau says.
Already retired? You might still be able to defer drawing down your savings, or at least withdraw less, by finding part-time work to supplement income from pensions or Social Security.
Of course, continuing to work isn’t feasible if, for instance, you’re retiring due to health issues or if you’ve been laid off and can’t secure another job. Or you may simply be reluctant to alter the hard-earned and carefully planned retirement lifestyle that you’ve foreseen for decades.
"Time is a currency too, and it’s crucial to weigh all the trade-offs," Braxton says. "Are you willing to forego the activities you had envisioned for your golden years without the pressure of an alarm clock? Because you never know what might happen, especially with your health."
Instead of working longer, consider downsizing or trimming expenses more than planned if the trade-off is worthwhile, Braxton advises. "The clearer your vision of the life you want in retirement, combined with the reality of your financial options, the more likely you are to arrive at a place where it all falls into place."
