One Market Crash Could Cost You 5 Years of Retirement Income

Sequence of returns risk is the single biggest threat to your retirement. Learn how a market crash in your first years of retirement can permanently damage your portfolio — and what to do about it.

The Risk Nobody Plans For

You've saved diligently for 30 years. Your portfolio hits $1.5 million. You retire. Then the market drops 35%.

This isn't a hypothetical — it happened in 2008, in 2020, and in various forms throughout market history. For someone accumulating assets, a crash is a buying opportunity. For someone in retirement withdrawing from their portfolio, it can be catastrophic.

This is called sequence of returns risk, and it's the single biggest threat to a retirement portfolio. A bad sequence of returns in the first 3-5 years of retirement can permanently reduce your portfolio's ability to sustain withdrawals — even if markets recover fully.

How Sequence Risk Destroys Retirement Plans

The math is counterintuitive. Two retirees can experience the exact same average returns over 20 years and end up with wildly different outcomes, depending on when the bad years occur.

Example: Same Average Returns, Opposite Outcomes

Retiree A: Bad years early

Starts with $1,000,000
Withdraws $50,000/year
Years 1-3: Returns of -25%, -15%, +5%
Years 4-20: Strong recovery, average 9%/year
Portfolio at year 20: $380,000 (running out of money)

Retiree B: Bad years late

Starts with $1,000,000
Withdraws $50,000/year
Years 1-17: Strong returns, average 9%/year
Years 18-20: Returns of +5%, -15%, -25%
Portfolio at year 20: $1,100,000 (still growing)

Same average annual return. Same withdrawal rate. But Retiree A is nearly broke while Retiree B is fine. The difference is entirely timing.

Our Market Crash Impact Calculator lets you model different crash scenarios against your specific portfolio and withdrawal plan.

The Tax Multiplier Effect

Sequence risk gets worse when you factor in taxes — and this is where most retirement planning falls short.

Forced Selling + Taxes = Double Penalty

When markets crash and you need income, you're forced to sell investments at depressed prices. If those assets are in a traditional IRA or 401(k), you pay income tax on every dollar withdrawn. You're selling low AND giving 22-32% of the proceeds to the IRS.

Here's a concrete example:

You need $80,000 in retirement income
Your traditional IRA is down 30%
To net $80,000 after taxes (at the 22% bracket), you need to withdraw ~$103,000
That $103,000 withdrawal depletes shares worth far more at their normal value
Those shares can never recover because they're gone from the portfolio

RMDs Don't Care About Market Conditions

Required Minimum Distributions are calculated based on your December 31 balance. If the market crashes in January and your December balance was high, you're still required to distribute based on the pre-crash value. You're forced to sell at the worst possible time.

By age 80+, RMD percentages reach 5-6% of your balance annually. In a down market, this forced liquidation accelerates portfolio depletion dramatically.

The Roth Conversion Shield

Strategic Roth conversions — done before and during the early years of retirement — create a powerful hedge against sequence risk. Here's how:

1. Tax-Free Withdrawals in Down Markets

With a Roth IRA, you can withdraw funds during a crash without owing any income tax. Instead of needing to withdraw $103,000 to net $80,000 (traditional IRA), you withdraw exactly $80,000 from the Roth. That's $23,000 less portfolio depletion in a single year.

Over a 2-3 year crash, the difference compounds. That's potentially $50,000-$70,000 in preserved portfolio value — money that participates in the recovery.

2. No Forced Selling via RMDs

Roth IRAs have no RMDs during the original owner's lifetime. In a downturn, you can choose to withdraw nothing from the Roth and let it recover, while using other income sources (Social Security, pensions, cash reserves) to cover expenses.

With a traditional IRA, you don't have that choice after age 73. The RMDs keep coming regardless of market conditions.

3. Tax Bracket Control

In a market crash, your traditional IRA balance drops — but your tax burden from other income sources doesn't. If you're relying solely on traditional IRA withdrawals, you have no tax flexibility.

With a Roth balance available, you can strategically pull from whichever account optimizes your tax situation that year. Pull from the Roth in high-tax years or down markets. Pull from traditional when brackets are favorable.

4. The Conversion Opportunity During Crashes

Here's a silver lining most people miss: a market crash is actually an excellent time to do Roth conversions. If your traditional IRA drops from $500,000 to $350,000, you can convert the same number of shares but pay taxes on a lower dollar amount. When the market recovers, all that growth happens inside the tax-free Roth.

This is why having a multi-year conversion plan matters — it allows you to accelerate conversions during downturns.

Building a Crash-Resistant Retirement

The Bucket Strategy

One practical approach divides your retirement assets into three time-horizon "buckets":

Bucket 1: Short-term (0-3 years) Cash and short-term bonds. Covers 2-3 years of living expenses without touching investments. This is your crash buffer.

Bucket 2: Medium-term (3-10 years) Balanced portfolio of bonds and conservative equities. Replenishes Bucket 1 during normal markets.

Bucket 3: Long-term (10+ years) Growth-oriented investments, including Roth IRA assets. Has time to recover from any crash. The tax-free growth in the Roth is most valuable here.

The Roth Conversion Ladder

Before retirement, build your Roth balance through a systematic conversion strategy:

Ages 55-62 (or whenever you retire): Begin converting while you still have employment income. The OBBBA's permanent lower tax rates make this a known-cost proposition.
Ages 62-67 (pre-Social Security): This is the sweet spot. Income is lowest, and the higher standard deduction ($31,500 MFJ) plus the new senior deduction ($4,000/person for 65+, through 2028) create room for tax-efficient conversions.
Ages 67-73 (pre-RMD): Continue converting but coordinate carefully with Social Security income to avoid IRMAA thresholds.

By the time RMDs begin at 73, your traditional IRA balance is substantially reduced, and your Roth provides a tax-free buffer for the next 20+ years.

Use our Market Crash Impact Calculator to see how different crash scenarios affect your specific retirement plan.

How Much Roth Do You Need?

A common guideline: aim for enough Roth assets to cover 3-5 years of retirement expenses. For a couple spending $100,000 per year, that's $300,000-$500,000 in Roth assets.

This gives you the flexibility to avoid selling from taxable accounts during any downturn while it recovers. Combined with 2-3 years of cash reserves (Bucket 1), you could weather a severe 5-7 year bear market without forced selling at depressed prices.

The Advanced Roth Planner can model optimal conversion amounts based on your target Roth balance and timeline.

The Bottom Line

You can't predict when markets will crash. But you can build a retirement structure that doesn't break when they do.

The combination of cash reserves, a strategic Roth conversion ladder, and tax bracket management creates a retirement that can absorb market shocks without permanent damage to your income plan.

The cost of not planning for sequence risk is far higher than the cost of strategic conversions. If your traditional retirement accounts exceed $500,000 and you're within 15 years of retirement, schedule a consultation to discuss how a crash-resistant withdrawal strategy could protect your retirement income.