Should You Delay Retirement if the Market Crashes Right Before?

After years of saving and planning, few scenarios are more unsettling than watching the stock market tumble just as you're about to retire. A sharp downturn could send your portfolio value plummeting, raising concerns about running out of money if you stick to your original plan.

But does a market crash automatically mean you should delay retirement? Not necessarily.

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While postponing retirement could make sense in some situations, it's far from the only option. The right decision depends on your financial situation and the mental toll of stopping your paychecks when market conditions aren't good.

You may be able to keep your plans

Retiring during a market crash could put you at risk of depleting your savings if your portfolio has lost a lot of value, you don't have any wiggle room with your withdrawal strategy, and you don't have cash reserves to tap. But if you do have flexibility with regard to spending along with a nice cash cushion, you may not have to alter your plans.

Let's say your IRA balance drops from $1.2 million to $900,000 during a market crash just as you're retiring. If your initial plan was to withdraw $45,000 a year from savings to cover your costs, on a $1.2 million portfolio, that's a pretty safe 3.75% rate. On $900,000, it's a riskier 5%.

However, if you're able to reduce spending to make a $35,000 withdrawal work, that's a roughly 3.9% withdrawal rate, which is less problematic. Or, you may not need to touch your investments at all.

Let's say you moved some money out of investments in your retirement account and now have $90,000 sitting in cash. That's enough to cover two years of $45,000 withdrawals without having to sell investments when they're down. And while recovery timelines are never guaranteed, two years may be enough time for your portfolio to regain lost value as markets pick back up.

Consider your mental health, too

You may be able to keep your retirement date intact despite a market crash if you're willing to reduce spending and/or have a sizable cash cushion. But even so, if retiring in a down market will wreak havoc on your mental health and make it so you're stressed out about spending money, then it may not be the best idea.

This isn't to say you can't afford it. But it may not be worth retiring only to spend months on end worrying about money and being anxious every time you tap your IRA.

All told, you don't have to rush to scrap your plans if the market tanks right before retirement. But consider whether delaying is right for you based on your spending requirements, cash reserves, and need for peace of mind.

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