Here's How to Prevent an Early Market Crash From Destroying Your Retirement

If there's one scenario that has the potential to upend your retirement plans, it's a market crash shortly after you've brought your career to a close.

A stock market crash early on in retirement exposes you to sequence-of-returns risk. If you're forced to sell assets early on to cover essential costs, you'll have fewer assets left to regain value once the market recovers.

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But while an early market crash might seem like the sort of thing that could wreck your retirement completely, it doesn't have to. Here's how to prevent that from happening.

1. Be flexible with your spending

Before you retire, it's wise to come up with a monthly budget that accounts for your essential needs as well as discretionary expenses. There's nothing wrong with sticking to that plan when market conditions allow for it. But if the market crashes right away, you may need to rethink that spending plan.

If you're able to cut spending by even 10% to 15% during a crash, it could spell the difference between more of your savings recovering versus less. The easiest areas to reduce spending may be discretionary expenses, though it pays to really comb through your expenses one by one and see if there's room to make cuts temporarily.

2. Consider working again

Many people think the point of retirement is to stop working. So returning to a job might seem like the last thing you'd want to do.

But if the market crashes, you don't want to claim Social Security just yet, and you can only reduce spending so much, generating income with a part-time job could be your ticket to preserving your savings.

Remember, though, that you don't need to work on a preset schedule. You could join the gig economy or try consulting in your former field during times when you're less busy.

3. Maintain a cash cushion

One of the best ways to prevent long-term damage from a stock market crash early on in retirement is to go in with a solid cash cushion. This is the sort of thing you'll need to set up in advance, though.

As a general rule, it's wise to shift enough assets into cash ahead of retirement to cover one to three years' worth of bills. This allows you to cover expenses without having to sell investments at a loss.

Now, having a cash cushion doesn't mean you shouldn't try to reduce spending or work a bit to generate income. If you have a two-year cash reserve but it takes the market three years to recover, you'll fall short. But using cash combined with the steps above could enable you to avoid major losses in your retirement account.

An early market crash in retirement is certainly unfortunate, but it can sometimes be unavoidable. The key is to be ready for that scenario and willing to adapt your plans for the time being.

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