Blog
Market Volatility in Retirement: How to Protect Your Income When the Market Drops
Michael H. Baker, CFP®, CIMA® RICP®, RMA®
Date
Nov 26, 2025
Category
Content
When you’re still working, market downturns are stressful—but you at least have a paycheck coming in and years to recover.
In retirement, that same volatility feels very different. Your portfolio isn’t just a number on a statement anymore; it’s the source of the income you use for groceries, travel, and healthcare. A big market drop can make you wonder, “Is my plan still okay?”
Before we go further, an important note:
This article is for general educational purposes only. It is not personal investment, tax, or legal advice. Investments involve risk, including possible loss of principal. Before you make any decisions, consult a qualified tax professional and a certified financial advisor who understands your full situation.
With that in mind, let’s walk through how market volatility affects retirees—and several ways to help protect your income when markets drop.
Why Market Volatility Feels Different in Retirement
There are three big reasons volatility feels more dangerous once you stop working:
1. You’re taking money out, not putting money in
During your working years, most people invest a portion of every paycheck. When markets fall, those contributions buy more shares at lower prices, which can help over the long run.
In retirement, you’re often doing the opposite—selling investments to fund your lifestyle. If you’re forced to sell during a downturn just to meet expenses, you lock in losses and leave fewer shares to participate in the eventual recovery. This is sometimes called sequence of returns risk.
2. You have less time to recover
A major downturn early in retirement can have a larger impact than a downturn later on, simply because your portfolio has more years of withdrawals ahead of it. You may not have enough time—or tolerance—to ride out a full market cycle without adjustments.
3. Emotions are higher
When your portfolio is directly tied to your monthly “paycheck,” every headline can feel like a threat. Emotional decisions—moving to cash at the wrong time, chasing the latest trend, or abandoning a long-term plan—can be just as harmful as the downturn itself.
The goal of good retirement planning isn’t to eliminate volatility (that’s not realistic), but to build a structure that lets you keep paying your bills and stay calm when markets move.
Step 1: Separate Your “Paycheck” From the Market
One way retirees create breathing room is by setting aside near-term spending in very low-volatility investments, so that a market drop doesn’t immediately threaten their lifestyle.
Common approaches include:
Keeping 6–12 months of essential expenses in a checking or savings account.
Holding another 1–2 years of spending needs in short-term instruments such as money market funds or short-term, high-quality bonds.
Setting up automatic monthly transfers from those conservative assets into your checking account—essentially, paying yourself a regular “retirement paycheck.”
This kind of cash reserve or “sleep-well-at-night fund” means that in a severe downturn, you may be able to pause or reduce withdrawals from more volatile investments, giving your portfolio time to recover.
The exact amount and investment vehicles should be determined with your advisor based on:
How much you spend,
How much guaranteed income you already have (Social Security, pension, etc.),
Your risk tolerance, and
Interest rate and inflation conditions.
Step 2: Use a Time-Based “Bucket Strategy”
A common framework planners use is the bucket strategy, which divides your assets by when you expect to use them:
Short-Term Bucket (0–3 years)
Purpose: Cover near-term living expenses.
Typical holdings: Cash, money market funds, short-term, high-quality bonds.
Goal: Stability and liquidity, not growth.
Intermediate Bucket (3–10 years)
Purpose: Refill the short-term bucket as it’s spent down.
Typical holdings: A mix of bonds and conservative or balanced funds.
Goal: Moderate growth with controlled volatility.
Long-Term Bucket (10+ years)
Purpose: Combat inflation and support your lifestyle later in retirement.
Typical holdings: More growth-oriented investments such as diversified stock funds.
Goal: Long-term growth, with the understanding that values will fluctuate.
In a market downturn, you ideally draw income from the short-term bucket and give your long-term investments time to recover. When markets are healthier, you can refill the short-term and intermediate buckets by taking gains from the long-term bucket.
A bucket strategy doesn’t remove risk, but it can help you avoid selling long-term investments at the worst possible time.
Step 3: Make Your Withdrawal Strategy Flexible
A rigid, “set it and forget it” withdrawal rule (for example, taking the same dollar amount no matter what markets do) can be stressful in a prolonged downturn.
Instead, many retirees use flexible withdrawal guidelines. Examples include:
Percentage-based withdrawals
Taking a fixed percentage (say, 3–5%) of your portfolio each year. Your income will adjust as markets move, but you’re less likely to deplete your portfolio prematurely.Guardrail strategies
Starting with a target withdrawal and then temporarily tightening or relaxing spending if your portfolio crosses certain thresholds. For example, you might agree that if your portfolio falls by more than a set percentage, you’ll pause large discretionary expenses (big trips, new car) until it recovers.Priority spending tiers
Separating expenses into:Essential (housing, food, insurance),
Important but flexible (gifts, smaller trips), and
Purely discretionary (luxury travel, large purchases).
In a downturn, you maintain essentials and adjust the other tiers as needed.
A CFP® professional can help you understand the trade-offs between income stability and long-term sustainability—and build withdrawal rules that fit your situation.
Step 4: Align Your Risk Level With Your Reality
Sometimes the biggest danger in a downturn isn’t the market itself—it’s realizing after the drop that your portfolio was taking more risk than you were comfortable with.
As you approach and enter retirement, it’s important to review:
Overall asset allocation (percentage in stocks, bonds, and cash),
Concentration risks (too much in a single stock, sector, or geographic region), and
Your own comfort level—how much volatility you can realistically live with while relying on the portfolio for income.
Points to discuss with your advisor:
Does your current allocation match your time horizon for each bucket?
Are there ways to diversify more effectively across asset classes and regions?
Would smoothing risk with a more balanced allocation increase the odds that you can stay the course in rough markets?
Reducing risk does not eliminate the possibility of loss, and more conservative investments may not keep up with inflation. The goal is a balanced mix that supports both your income needs and your peace of mind.
Step 5: Coordinate Tax Strategy With Market Strategy
Tax considerations matter when you’re deciding where to pull income from during volatile markets. Without giving specific tax advice, here are some general concepts to understand and review with your tax professional:
Account types
Taxable accounts (individual or joint brokerage),
Tax-deferred accounts (traditional IRA, 401(k), 403(b), etc.),
Tax-free accounts (Roth IRA, Roth 401(k), where rules are met).
Tax-aware withdrawals
In some years, it may make sense to draw more from one type of account than another, depending on:Your current tax bracket,
Future Required Minimum Distributions (RMDs),
The potential impact on Social Security taxation and Medicare premiums.
Using downturns thoughtfully
Market declines may create opportunities—such as tax-loss harvesting in taxable accounts or Roth conversions at temporarily lower portfolio values. These strategies are complex and should be coordinated with a tax professional and financial planner.
A well-designed plan treats investments, income needs, and taxes as connected pieces, not separate decisions made in isolation.
Step 6: Have a Written “Playbook” for Market Declines
One of the most powerful tools in retirement isn’t a specific product or investment. It’s a clear, written plan that says:
What you will do when markets drop,
How much income you can safely take under different conditions,
Which accounts you’ll draw from first,
When you and your advisor will revisit or adjust your strategy.
Your playbook might include rules like:
“If the market falls more than X%, we’ll:
Pause major discretionary spending,
Temporarily draw more from cash or short-term bonds,
Schedule a review to rebalance as appropriate.”
“Once a year, we’ll rebalance the portfolio back to target, selling what has grown above its range and adding to what falls below its range.”
Having these guidelines in writing helps you and your advisor respond calmly and consistently, rather than react emotionally to headlines.
How a Financial Planner Can Support You Through Volatility
A seasoned financial planner doesn’t predict the next market move—no one can reliably do that. Instead, they help you:
Clarify your income needs, goals, and priorities.
Design an investment and withdrawal strategy aligned with those goals and your risk tolerance.
Build appropriate buffers (cash reserves, time-based buckets, diversified allocations).
Coordinate with your tax and legal professionals so your plan works together across all areas.
Provide ongoing guidance and perspective when markets are turbulent, so you aren’t making isolated decisions in the heat of the moment.
If you’re already retired, or within 5–10 years of retirement, this is often a critical time to make sure your plan is structured to handle volatility before it arrives.
Important Disclosures
This material is for informational and educational purposes only and is not intended as individualized investment, tax, or legal advice.
Investment strategies, including diversification and asset allocation, do not guarantee a profit or protect against loss in declining markets.
All investments involve risk, including the possible loss of principal.
Examples are hypothetical and for illustrative purposes only. Your results will differ.
Before implementing any strategy, consult with appropriate professionals, including a qualified tax advisor and a certified financial planner, to determine what is suitable for your specific circumstances.
Investment advisory and financial planning services offered through Advisory Alpha, LLC, a SEC Registered Investment Advisor. Insurance, Consulting and Education services offered through Vertex Capital Advisors. Vertex Capital Advisors is a separate and unaffiliated entity from Advisory Alpha, LLC. All written content on this site is for information purposes only. Opinions expressed herein are solely those of Michael H. Baker, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation. This website may provide links to others for the convenience of our users. Michael H. Baker has no control over the accuracy or content of these other websites. Please note: When you access a link to a third-party website you assume total responsibility for your use of linked website. Links and references to other websites and third-party content providers are offered for your convenience. We do not necessarily prepare, monitor, review or update the information provided by third parties. We make no representation or warranty with respect to the completeness, timeliness, suitability, or reliability of the referenced content.
