Retiring into a down market: How to make your savings last

Individuals nearing retirement—or just entering retirement—may be concerned about what a market downturn and higher inflationary environment may mean for their withdrawal strategy. They may also be thinking about the ability of their savings to support them throughout their retirement.

The sequence of returns (the order in which markets rise and fall) is important when it comes to your retirement withdrawal strategy. 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. To better understand the long-term impacts of this kind of early decline, we analyzed scenarios from three different time periods to gain insight on portfolio sustainability:

In 1973, the onset of the oil embargo and an energy crisis sparked a recession. The early 1970s was also one of the highest inflationary periods in history, as prices more than doubled in 10 years. Our analysis assumed a starting portfolio of $500,000 with an asset allocation of 60% stocks and 40% bonds throughout the entire horizon using the S&P 500 Index and the Bloomberg U.S. Aggregate Bond Index.¹

We tested the “4% rule,” assuming the investor started with an initial withdrawal amount that was 4% of the starting portfolio balance ($20,000 the first year). This amount was adjusted each year based on actual inflation² in order to maintain purchasing power over the 30-year spending horizon. Many experts consider the 4% rule a safe starting point to help investors navigate an uncertain market environment, especially at the onset of retirement.

The beginning monthly withdrawal for this investor was $1,667. But retirement would get off to a rocky start as they entered a bear market that would see the S&P 500 Index decline 48% within the next two years. (See Fig. 1.) Not only did the investor have to cope with watching their portfolio shrink to less than $300,000 by November 1974, but inflation was also a significant factor. Inflation ended in 1972 at 3.4% and peaked at 13.5% by the end of 1980.²

Recovery was around the corner, however, and the investor’s balance began to grow again with the help of two subsequent bull markets. The account balance recovered to over $500,000 about 12 years into retirement in December 1985 and reached over $740,000 at the start of 1999. Those gains helped the investor weather the significant bear market in the early 2000s. And at the end of 30 years, the portfolio balance in this scenario was slightly over $400,000 despite all the market volatility during those decades.

Now let’s consider a more recent case: an investor retiring in 2000 using the same assumptions from our first scenario, although there are only data to cover part of a 30-year retirement. Assuming the same starting balance and use of the 4% rule, this retiree would start withdrawing $1,667 per month in the first year of retirement and adjust each year based on actual inflation to maintain purchasing power.

In this scenario, the investor encounters the bear market that started in March 2000 as well as the great financial crisis of 2008. The S&P 500 lost 49% between March 2000 and October 2002 and just over 56% between October 2007 and March 2009. However, working in the investor’s favor during this period was a benign inflationary environment.

The portfolio in this scenario declines to nearly $300,000 in February 2009, but a subsequent period of strong market growth helps it rebound—in this case, to over $536,000 as of year-end 2021. (See Fig. 2.)

This rebound coupled with a conservative withdrawal approach has helped this investor weather the downturn in 2022 and the tariff-related volatility in 2025. Their portfolio balance dropped to about $470,000 by March 31, 2025, yet they appear to be on a sustainable path. Using the T. Rowe Price Retirement Income Calculator to assess the next five years of retirement,³ we find the portfolio will accommodate continued spending, resulting in a simulation success rate of more than 95%. That means out of the 1,000 market scenarios, the investor had at least $1 remaining at the end of plan in more than 950 of them.

The inflation assumption used in our projection is 3%. This assumption has been a bit higher than actual inflation for many years; however, inflation increased dramatically, peaking as high as 8% or more for many goods and services in 2022.⁴ While inflation has abated recently, it is still an uncertainty that’s top of mind for investors.  

Applying a stress test to the sustainability of the portfolio, if we assume the balance drops by 20% to $377,014, we find the simulation success rate does change to 89%—still well within an acceptable confidence zone generally defined as a simulation success rate of 80% and higher.

Now let’s consider a most recent case: an investor retiring in 2008 using the same assumptions from our other scenarios. Today, this retiree would be about 17 years into a 30-year retirement horizon. Assuming the same starting balance and use of the 4% rule, this retiree would start withdrawing $1,667 per month in the first year of retirement and adjust each year based on actual inflation to maintain purchasing power. In this scenario, the investor encounters the great financial crisis of 2008, when the S&P 500 lost just over 56% between October 2007 and March 2009, and the pandemic-related downturn in early 2020. Working in investors’ favor, however, has been the remarkably strong stock market performance of the last two calendar years, in addition to the almost 12 years of market gains prior to 2022.

The portfolio in this scenario declines to about $326,000 in February 2009, but a subsequent period of strong market growth helps it rebound—in this case, to over $866,000 as of year-end 2021. And with strong performance after the dip in 2022, the portfolio balance grew to over $887,000 as of year-end 2024. (See Fig. 3.)

This investor is a little more than halfway into a 30-year retirement horizon and appears well positioned to tackle future uncertainty even as their portfolio balance dropped to about $867,000 by March 31, 2025.

Using the T. Rowe Price Retirement Income Calculator to assess the next 13 years of retirement,⁵ we find the portfolio will accommodate continued spending, resulting in a simulation success rate of more than 95%.  

And, stress testing the portfolio assuming a 20% drop of the balance to $693,813, the simulation success rate remains at a sustainable level, above the 95% threshold.

It is important to reassess the situation each year. For example, should the market continue to slide and inflation begin to increase again, then spending adjustments may be warranted, but the approach can be a measured, rather than a panicked, response.

The idea of retirement itself may be overwhelming for many investors. And for those nearing or in retirement, it can be unsettling to see the market tumble. History has shown that down markets have typically been followed by healthy market recoveries. Investors have benefited from unprecedented market gains over the last sixteen years. As a result, their portfolios may be able to withstand inflationary pressures and higher spending needs over the short term.

Additionally, these scenarios assume the investor didn’t adjust their behavior due to the inevitable anxiety that steep market losses likely caused. It’s human nature to adapt and adjust, and retirees would likely want to modify their plans in some way. In fact, our research shows that, on average, every year from age 65 onward, inflation-adjusted retiree spending goes down about 2%.⁶ If investors feel the need to make changes, systematic adjustments to spending can help sustain portfolio balances throughout retirement. These seem like actions that most retirees expect to make, which could give them an even larger margin of safety in the long term.

By following a conservative withdrawal approach early in retirement and planning for temporary adjustments along the way (if needed), retirees can weather the markets and have a truly fulfilling and enjoyable next phase of life.