Should You Automatically Delay Retirement if the Stock Market Crashes Right Before?

So you worked hard, saved well, and have begun making plans to resign from your job and bring your career to a close. But what happens if the stock market tanks just as you're about to begin the final countdown toward retirement?

Retiring into a market crash can be risky. If you're forced to sell assets when their value has decreased substantially, there's a chance your portfolio might never fully recover. That could, over time, put you at risk of depleting your retirement savings.

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But a stock market crash doesn't automatically mean you'll need to postpone your retirement. With the right income plan, you may be able to forge forward despite unfavorable market conditions.

It's a matter of how your money is allocated

If you have the bulk of your money in the stock market, or all of it, then a poorly timed crash could derail your retirement plans. But if you have a decent cash cushion and margin of safety, you don't automatically have to put off retirement because of a market crash.

Let's say your spending needs amount to $100,000 a year, and you have a $2.5 million portfolio. That amounts to a 4% withdrawal rate, which experts have historically considered safe. However, if accessing that $100,000 means having to sell that many assets at a loss, you could put your portfolio at risk.

On the other hand, let's say you knew going into retirement that you'd need $100,000 a year to cover your expenses, and you allocated $300,000 of your $2.5 million to cash. In that case, you may not have to delay retirement even with the market being down. You could, in that situation, live off your cash reserves for three full years without having to sell a single investment at a loss.

In fact, this is why financial experts commonly recommend shifting into safer assets ahead of retirement and reducing stock market exposure. If, by the time you're about to retire, you have a few years' worth of living costs in cash coupled with a decent bond allocation, you may end up in a strong position to ride out stock market downturns.

Another thing to consider is that if you're able to claim Social Security, that reduces potential portfolio strain. If you're married and looking at $80,000 a year in benefits between you and your spouse, even if you don't have a particularly large cash allocation, you may still be safe to retire on schedule.

If you're looking at pulling $20,000 a year from your portfolio for a few years during a down market, for example, that's not nearly the same thing as withdrawing $100,000 per year. And you may have enough income in your portfolio from dividends to avoid having to unload assets when their value is down.

Of course, you do want to be careful with Social Security. Though you can claim benefits as early as age 62, those monthly checks will be reduced if you don't wait until full retirement age to file, which is 67 if you were born in 1960 or later. But if you're retiring in conjunction with reaching full retirement age, relying on Social Security could make a market downturn easier to cope with.

You can't control what the market does

A stock market crash right as you're about to retire might seem like terrible timing. And unfortunately, it's a situation you can't exactly control.

What you can control, though, is how you allocate your portfolio ahead of retirement. Maintaining the right cash reserves and bond allocation could make it possible to end your career on schedule even if market conditions are far from favorable. And using Social Security as a leverage point could also make it possible to stick to your plans in a situation like this.

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