Price Perspective - In Depth

Retirement Investing

Retiring in a Volatile Market

Judith Ward, CFP®, Senior Financial Planner

Executive Summary

  • Investors approaching retirement or those newly-retired are concerned about the timing of a potential market decline and how it will affect their nest egg.
  • Our analysis in applying an initial 4% withdrawal amount — and accounting for annual inflation adjustments — provided good results even when a bear market occurred early in retirement.
  • If investors wanted to further preserve account balances, they could choose to curtail discretionary spending and not take inflation adjustments.
  • A conservative withdrawal approach early in retirement can help investors weather markets over time. 

Nine years of stock market gains have resulted in growing account balances for many investors. However, individuals near retirement may wonder how an increase in market volatility may impact their ability to retire.

When it comes to spending down one’s nest egg in retirement, the sequence of returns (the order markets are rising and falling) is very important. Market declines within the first five years of drawing down retirement assets can significantly impact the chance of the portfolio lasting, especially when planning for a retirement horizon that could span decades.

As a result, retirees are hit with a double whammy: Their portfolio value declines, and withdrawing money to spend in retirement only serves to realize those portfolio losses.

To better understand the impact of market volatility on retirement security, we examined historical bear markets to see the effect they have on retirees when markets drop early in the retirement horizon.

We analyzed retirees from two different time periods:

  • Someone who retired January 1, 1973, the most recent 30-year period that started with a bear market.
  • Someone who retired January 1, 2000, who has already lived through two recent bear markets and is more than halfway into their retirement years.
Market Returns and Portfolio Balance Beginning in 1973

Past performance cannot guarantee future results.

Market Returns and Portfolio Balance Beginning in 2000

Past performance cannot guarantee future results.

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Retiring in a Bear Market

A conservative withdrawal approach early in retirement, especially if there is a bear market, can position retirees to weather market volatility over the long term.

Benchmark reflects the Bloomberg Barclays Government/Credit US Bond Index for the period 1973–1975 and the Bloomberg Barclays US Aggregate Bond Index from 1975 to the present.
Consumer Price Index, seasonally adjusted

Important Information

There are inherent risks associated with investing in the stock market, including possible loss of principal, and investors must be willing to accept them. Bond yields and prices will vary with interest rate changes. Investors should note that if interest rates rise significantly from current levels, bond fund total returns will decline and may even turn negative in the short term.

This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action. The views contained herein are those of the author as of February 2018 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

This information is not intended to reflect a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision.

Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.

Source for Bloomberg Barclays index data: Bloomberg Index Services Ltd. Copyright© 2018, Bloomberg Index Services Ltd. Used with permission.
Past performance cannot guarantee future results. All investments involve risk. All charts and tables are shown for illustrative purposes only.

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