What Happens If the Market Drops 20% Right After You Retire?
What happens if the stock market drops 20% shortly after you retire—and you still need to take money out of your portfolio for living expenses? The investments you choose to sell can affect more than where your retirement income comes from. They can change your portfolio allocation, your exposure to a future market recovery, your approach to rebalancing, and potentially your tax situation.
In this video, we use a hypothetical retired couple with a $2 million 60/40 portfolio to compare three ways of generating the same $80,000 of retirement income after a 20% stock market decline: selling stocks, selling bonds, or selling stocks and bonds proportionally. We then look at how coordinating portfolio withdrawals with rebalancing can help bring the portfolio back toward its intended allocation.
Quick Answer
If the market falls after you retire, where you take your retirement income from can change the portfolio you own afterward. Selling stocks, selling bonds, or withdrawing proportionally can each produce the same amount of cash while leaving you with different stock and bond allocations—and potentially different exposure to what happens next in the market.
Key Takeaways
- A market decline can change your asset allocation before you make a single withdrawal.
- Selling stocks after a decline can further reduce your stock exposure and the amount of your portfolio positioned to participate in a potential recovery.
- Selling bonds can move a portfolio closer to its previous allocation in some circumstances, but it also reduces the defensive assets available for future needs.
- Selling stocks and bonds according to your original allocation does not necessarily restore that allocation after the market has already moved.
- Retirement income withdrawals and portfolio rebalancing can sometimes be coordinated as part of the same planning decision.
- The account you withdraw from can introduce another consideration because traditional IRA, Roth, and taxable brokerage accounts can have different tax characteristics.
- A useful question isn’t simply, “What should I sell?” but “What do I want my portfolio to look like after I sell?”
Who This Is For
This video may be especially helpful if you are approaching retirement, already taking income from an investment portfolio, concerned about retiring before or during a market downturn, or trying to understand how portfolio withdrawals and rebalancing work together. It is also useful for investors who have a traditional stock-and-bond allocation, such as a 60/40 portfolio, and want to better understand what can happen when market declines and retirement withdrawals occur at the same time.
Watch the Video
Video Transcript
00:00 — What Happens If the Market Drops 20%?
You retire with $2 million. Six months later, the stock market falls 20%, but you still need income. So now you’ve got a decision.
Do you sell stocks that are depressed in price, or do you sell bonds instead? Or do you sell some of both? Those choices can all generate the same amount of income, but they don’t leave you with the same portfolio afterward.
And that’s the part I want to show you today. Because once you’re retired, a market decline isn’t just about what your investments are worth. It’s also about what you have to sell while they’re down.
One of the things I want to do more on this channel is show you how retirement decisions actually behave in the real world, not just explain the rules. The rules are one thing, but what happens with markets and withdrawals and taxes and when timing of those things, when it all collides, that’s where retirement gets really interesting. So in this video, we’re going to take the same retirement portfolio, create the same $80,000 of income three different ways, and watch what happens.
01:20 — The $2 Million Retirement Example
So we’re gonna start with a simple hypothetical example and a hypothetical couple named John and Linda. So John and Linda retire with a $2 million portfolio. 60% of it is in stocks and 40% is in bonds.
They need $80,000 from the portfolio for income purposes. Now, let’s say the stock side falls 20%. And for this illustration, I’m gonna just hold the bond side flat, not as assuming that the bonds don’t go up or down.
So we can just focus on the the decline in value of the stocks and what that does to the withdrawal decisions that you have to make. So here’s what the portfolio looks like after the decline. Without John and Linda really doing anything, the market has already pushed them away from their original 60-40 allocation.
Now they still need the $80,000 for normal living expenses. So let’s watch what happens depending on where that income comes from.
02:00 — Option 1: Selling Stocks
First example, we’re gonna look at what happens when they take the entire $80,000 from stocks. Here’s the breakdown after that withdrawal. Now notice what happened.
The market pushed them away from their original stock target, and the withdrawal pushed them even farther away. So the decline brought them to 5545, but once they sold the stocks, the allocation was of course lower, meaning less money in stocks and more money percentage-wise in bonds. So the stock assets they sold are no longer there to participate if stocks recover.
The market can recover, but John and Linda may not experience the recovery the same way because they reduced their stock exposure while prices were down.
02:51 — Option 2: Selling Bonds
Now, reset the clock. Same market decline, same $80,000 income need, but this time they take the money from bonds. Let’s watch what happens.
Here’s what the allocation looks like now. And this is interesting. Taking the income from bonds actually move them back closer to where the original allocation was, where they started.
In this example, the withdrawal is doing two jobs. It’s providing income, but it’s also partially rebalancing the portfolio. Now that doesn’t mean that bonds should always fund withdrawals when stocks are down.
They now have fewer bonds remaining, and that matters if stocks continue to drop or if they need those bonds for future income. The point is that the asset you sell changes the portfolio you own afterward.
03:38 — Option 3: Selling Stocks and Bonds
Now, let’s look at a choice that sounds fairly neutral. This is the third option we’re going to cover. What if John and Linda say, we were at a 60-40 portfolio?
So let’s just take 60% of the income need from the stocks and 40% from the bonds. Let’s watch what happens when they do that. So here’s the breakdown after that withdrawal.
And this is where the surprise shows up. Even though they sold in the old 6040 proportions, they didn’t get back to 6040. And why?
Because the portfolio wasn’t 6040 anymore when they made that withdrawal. The market had already changed it. So selling proportionately mostly preserved the drift instead of correcting it.
And if you’re looking at 5446 as an allocation and thinking, well, Troy, that’s pretty close to 6040. It’s only six percentage points. How much could that really matter?
Well, that’s a really good question. In fact, we ran the math over a 25-year retirement. I’m not gonna derail this video with it, but hang on until the end and I’m gonna show you where to watch that next.
Plus, I have one more scenario to cover, and this is one that I think will make a little bit more sense for you. Okay, so that’s generating $80,000 of income three different ways, selling stocks only, selling bonds only, and then selling proportionately the 60-40 that we originally started with as far as the portfolio allocation. And here’s the side by side comparison.
05:07 — How Withdrawals Change Your Portfolio
So while you look at the comparison, I want you to think of this question because everything in retirement is connected. So clearly you have to sell something to generate income, even in a market decline. So start thinking about when you have to make this decision, how does what you sell to generate income not just affect the way your portfolio behaves today, but how does it affect it next year and in subsequent years?
Now, of course, at any point in time, things can be kind of course corrected. But understand and connect the dots between selling income, market declines, all of those change the portfolio allocation. And practically that leads to another question, and that’s what do you want to own after you sell?
Meaning, I’ve sat with many clients after market declines, and it’s not uncommon to see the psychological profile change. Meaning, someone who thought that they were fairly aggressive because the market had been going up for several years in a row. all of a sudden sees their 60-40 portfolio drop, you know, a significant amount of money, they may not quite be as aggressive as they thought they were.
But also understand that there’s an element of fear and we can’t be afraid. We have to have the numbers and the growth expectations and our income needs. We have to have that all put together so we can make the best decision with good information, but just be cognizant of the fears of the emotions.
Some may be fear, some may be greed, just be aware of them. and try to make the best decision you can with that information. So now let’s say John and Linda have done that and they still want the 60-40 portfolio after taking income.
Well then the withdrawal and the rebalance can be coordinated. Let’s watch what happens when you coordinate those two.
06:53 — Coordinating Withdrawals and Rebalancing
Instead of taking only what they need for spending from the bonds, they can sell more from the bond side of the portfolio. Part of that sale will go out to the will go out to them for for income to fund the $80,000 need, but the rest stays inside the portfolio and switches. It gets redeployed into stocks.
That gets the portfolio back to the intended 6040 target, which is important because the growth expectation of a 60-40 portfolio. Is going to be different than the growth expectation of a 5446 or 5248. So you don’t need to memorize all of those numbers.
The important point is that the retirement income decision and the rebalancing decision can sometimes be the same. They can be coordinated. And we haven’t even talked about which account these investments are held in.
This is another coordination aspect of retirement planning. If the assets are held inside a traditional IRA, A distribution generally enters a tax picture differently than a sale from inside a brokerage account. Roth accounts have different tax characteristics too.
07:55 — Adding Taxes to the Decision
As long as they’re qualified distributions, that income is tax-free. Multi-account distributions can come into play. So there’s an investment decision, it can become a tax decision.
And I’m not going to turn this into a tax video, but the point is simply that where income comes from may affect more than just the portfolio allocation. That’s what this entire video has been about is how income decisions impact the portfolio allocation. But now the tax is the the third layer of the onion that needs to be considered as well.
I have tons of videos about tax planning on this topic on the channel. So if you’re new to the channel, feel free to go and find those, look those up. But understand that the real risk isn’t simply that stocks fall 20%.
The retirement problem is what happens when the market falls at the same time you need income from the portfolio. Sell stocks and you change how much exposure you have to the market, which determines how much remains for a recovery. Sell bonds and you change the defensive side of your portfolio.
Sell both proportionally, and you may simply preserve the drift the market has already created. So the better question isn’t just what should I sell? It’s how does what I sell to generate income affect the way my portfolio behaves over time?
And then what do I want to own after I sell? Or what do I want my portfolio to look like after I sell?
09:13 — What to Remember During a Market Decline
That’s what I mean when I talk about understanding how retirement behaves. It’s not just knowing the rules, it’s seeing how one decision changes what happens next. Rules tell you what’s possible, behavior shows you what happens next.
You don’t have to predict when the next market decline is coming, but you do want visibility into what you’ll sell, where your income will come from, and how those decisions may affect the portfolio you own afterward. And remember that 54-46 portfolio? If you want to see What staying six percentage points below the ideal equity target could mean over a 25 year retirement?
We ran the numbers. And to watch that next video, you can click right here.
Retirement Income and Market Declines: What to Consider
The central lesson from this example is that generating retirement income isn’t isolated from the rest of your investment strategy. A withdrawal changes the assets remaining in your portfolio, and those changes can influence your allocation and how your portfolio participates in future market movements.
This is particularly important when withdrawals occur after a market decline. Rather than viewing the income decision solely as a question of where to find the cash, retirees can also consider what they want their portfolio to look like after the withdrawal and whether the withdrawal can be coordinated with their broader rebalancing strategy.
Free Retirement Income Guide
Want to learn more about creating reliable income from your savings in retirement? Download our free guide, 5 Ways to Turn Savings Into Retirement Income, to explore five strategies for turning the wealth you’ve built into income for the years ahead. https://click2retire.com/4zpXk3J
Frequently Asked Questions
What happens if the stock market drops right after I retire?
A market decline can reduce the value of your portfolio and change your asset allocation before you take any retirement income. If you then need to make a withdrawal, the investments you sell can further change the portfolio you own afterward.
Should you sell stocks or bonds when the market is down?
There isn’t one answer presented in this video that applies to every retiree. The example demonstrates that selling stocks, selling bonds, and selling both proportionally can each generate the same income while producing different ending allocations. The decision should be considered in the context of what you want to own after the withdrawal.
What happens if you sell stocks after a market decline?
In the hypothetical example, selling the entire $80,000 withdrawal from stocks moves the portfolio farther away from its original stock allocation. Those shares are also no longer available to participate in a potential stock-market recovery.
Can you use bonds for retirement income when stocks are down?
In the example, taking the withdrawal from bonds moves the portfolio closer to its original 60/40 allocation and effectively allows the withdrawal to partially rebalance the portfolio. However, doing so also leaves the retiree with fewer bonds, which could matter if stocks continue to decline or those bonds are needed for future income.
Does withdrawing 60% from stocks and 40% from bonds maintain a 60/40 portfolio?
Not necessarily. In this example, the market decline had already moved the hypothetical portfolio away from 60/40 before the withdrawal occurred. Taking the withdrawal according to the original 60/40 percentages therefore mostly preserves that drift rather than restoring the original allocation.
Can retirement withdrawals and portfolio rebalancing be coordinated?
Yes. The video illustrates a scenario in which more bonds are sold than are required for the retiree’s immediate income need. The amount needed for income leaves the portfolio, while the remaining proceeds are redeployed into stocks to bring the portfolio back toward its intended 60/40 allocation.
Do taxes matter when deciding where retirement income comes from?
They can. The video notes that distributions from a traditional IRA can enter the tax picture differently from sales within a taxable brokerage account, while qualified Roth distributions have different tax characteristics. This means a portfolio withdrawal decision can also become a tax-planning decision.
Continue Learning
Want to see what staying six percentage points below the equity target could mean over a 25-year retirement? Watch the companion video where we run the numbers on a 54/46 portfolio versus a 60/40 portfolio.
Topics Covered
Retirement planning, retirement income, portfolio withdrawals, market downturns in retirement, sequence of returns risk, 60/40 portfolios, stocks and bonds, portfolio rebalancing, retirement investing, IRA withdrawals, Roth distributions, taxable brokerage accounts, and retirement tax planning.
