What Happens to Your Financial Plan During a Stock Market Decline? A Guide for Pre-Retirees and New Retirees in the Houston Area

By: Alex Bridges, CFP®, EA, ChFC®, RICP®

When the stock market drops, the question I hear most from people nearing retirement isn’t “How much did I lose?” It’s “Does my plan still work?” That’s the right question, and the answer depends far more on how the plan was built than on the size of the decline.

This article is written for a specific group: people in The Woodlands, Spring, Conroe, and the broader Houston area who are within about five years of retiring, or who retired in the last few years. For this group, a market decline can affect the plan differently than it would for someone with decades left to invest.

Does a stock market decline mean your financial plan is broken?

Not necessarily. A sound financial plan is designed with the expectation that markets will decline at some point, sometimes sharply. A downturn is a stress on the plan, not automatic evidence that the plan has failed.

What matters is whether your plan has room to absorb the decline. That usually comes down to three things: how much of your near-term spending depends on stocks, how flexible your spending is, and whether you have income sources that don’t move with the market.

Why does a decline matter more right before and after retirement?

The answer is something planners call sequence-of-returns risk. When you’re still working and contributing, a decline can mean buying investments at lower prices. Once you start withdrawing, a decline can force you to sell investments while they’re down to fund your spending.

Selling during a decline locks in losses on the shares you sell, which leaves fewer shares to participate in any later recovery. Two retirees with the same average return over 20 years can end up in very different places depending on whether the weak years came early or late.

That’s why the window around your retirement date deserves extra attention. The same decline that’s an inconvenience at 45 can be a planning event at 63.

What should a well-built plan already account for before a decline happens?

Most of the work of handling a market decline happens before it starts. A few planning elements tend to make the biggest difference for people near retirement.

Is there a cash or short-term reserve for spending?

Many retirement income plans keep a reserve of cash or short-term, high-quality bonds set aside for near-term spending. The goal is to give you the option of not selling stocks during a decline.

The right size of that reserve depends on your spending, your other income, and your comfort with volatility. There is no universal number, and holding too much cash has its own long-term cost.

Does your asset allocation match your timeline?

The SEC’s investor education resources on Investor.gov describe asset allocation and diversification as core tools for managing investment risk, with the appropriate mix depending on your time horizon and risk tolerance. For pre-retirees, that often means reviewing whether the portfolio was adjusted as retirement got closer, or whether it still reflects an allocation chosen years earlier.

Diversification does not guarantee a profit or protect against loss in a declining market. It is designed to reduce the chance that one part of your portfolio drives the whole outcome.

Do you have income that doesn’t depend on the market?

Social Security, pensions, and some annuity income continue regardless of what the stock market does. The more of your essential spending those sources cover, the less pressure a decline puts on your portfolio.

What actually changes in your plan during a decline?

In a well-structured plan, a decline usually triggers a review rather than a rebuild. Here are the levers that are typically worth evaluating.

Should you change where your retirement withdrawals come from?

If you have a cash reserve or bond allocation, it may make sense to draw spending from those assets while stocks are down, rather than selling equities. This approach is designed to give the stock portion of the portfolio time to recover, though recovery timing is never certain.

Some retirees also have flexibility on which account type to draw from, such as taxable, tax-deferred, or Roth. During a decline, the order of withdrawals can affect both taxes and how much you sell at depressed prices.

Should you trim your spending temporarily?

Flexible spending is one of the most effective tools a retiree has. Postponing a large discretionary purchase or trimming travel for a year can reduce how much you need to withdraw while the portfolio is down.

For many families, the plan doesn’t require drastic cuts. But knowing in advance which expenses are flexible makes the decision far easier in the moment.

Is it time to rebalance?

A decline in stocks shifts your mix toward bonds and cash. Rebalancing back to your target allocation means selling some of what held up better and buying what fell. It can feel uncomfortable, but it is designed to keep your risk level consistent with your plan.

Are there tax planning opportunities during a market decline?

A downturn can open tax planning opportunities that don’t exist in rising markets. Whether any of them fit depends on your accounts, income, and tax bracket.

How does tax-loss harvesting work?

If you hold investments in a taxable brokerage account that have fallen below what you paid, selling them can realize a capital loss. Under the rules described in IRS Publication 550, capital losses can offset capital gains, and net capital losses beyond that can offset up to $3,000 of ordinary income per year ($1,500 if married filing separately), with unused losses carried forward.

The wash sale rule under Internal Revenue Code Section 1091 disallows the loss if you buy a substantially identical security within 30 days before or after the sale. Harvesting losses needs to be coordinated carefully so you stay invested without triggering that rule.

Could a Roth conversion make sense during a decline?

A Roth conversion moves money from a traditional IRA to a Roth IRA, and the converted amount is generally taxable as ordinary income in the year of conversion, as explained in IRS Publication 590-A. When account values are down, converting the same number of shares produces a smaller taxable amount.

If those shares later recover inside the Roth, that growth may be tax-free under the qualified distribution rules. Conversions can no longer be undone, so this decision should be reviewed against your current and expected future tax brackets with a qualified professional.

What about required minimum distributions?

If you’re old enough to take required minimum distributions, the amount is generally based on your account balance as of the prior December 31, according to IRS Publication 590-B. That means a decline this year doesn’t reduce this year’s required amount.

The IRS rules generally allow an RMD to be satisfied by distributing shares in-kind rather than cash. For some retirees, that may help avoid selling investments at depressed prices just to meet the requirement.

What should you avoid doing during a market decline?

The most costly decisions during a decline are usually emotional ones. A few to be especially careful with:

Moving everything to cash after a large drop, which can turn a temporary decline into a permanent loss if you miss a recovery.
Making a major allocation change based on a news headline rather than your plan.
Stopping contributions to workplace retirement plans if you’re still working and your plan calls for them.
Assuming that because markets have recovered from past declines, every future decline will recover on the same timeline. Past performance does not guarantee future results.

How does a fiduciary advisor approach a market decline?

Under the Investment Advisers Act of 1940, as described in the SEC’s 2019 Commission Interpretation Regarding Standard of Conduct for Investment Advisers, registered investment advisers owe clients a fiduciary duty that includes both a duty of care and a duty of loyalty. The CFP Board’s Code of Ethics and Standards of Conduct also requires CFP® professionals to act as fiduciaries when providing financial advice.

In practice, I think that duty matters most during a decline. It means revisiting the plan with you, explaining what has and hasn’t changed, and recommending changes only when they serve your interests, not because activity feels reassuring.

A fee-only financial advisor is compensated only by clients, not by commissions on products. That structure is designed to reduce the conflicts that can arise when an advisor earns more by recommending a product or a trade during a volatile market.

How can you stress-test your plan before the next decline?

The best time to review how your plan would handle a downturn is before one happens. A few questions worth answering with your advisor or on your own:

How many years of spending could you cover without selling stocks?
Which of your expenses could you postpone or reduce for a year or two if needed?
How would your plan look if a significant decline occurred in your first year of retirement?
Do you have a written withdrawal strategy that covers which accounts to draw from in different market conditions?
Have you identified tax planning opportunities, such as loss harvesting or Roth conversions, that you would want to evaluate during a downturn?

If you’re in The Woodlands or the Greater Houston area and want a second set of eyes on how your retirement plan would handle a market decline, Tiverton Wealth provides fiduciary financial planning and retirement income planning for pre-retirees and retirees. You can learn more about our approach to retirement planning in The Woodlands, TX on our website.

About the author

Alex Bridges, CFP®, EA, ChFC®, RICP®, is the founder of Tiverton Wealth, LLC, a fee-only Registered Investment Advisor based in The Woodlands, TX, serving individuals, families, and retirees across Greater Houston.

You can review my full regulatory background on the SEC’s Investment Adviser Public Disclosure website: Alex Bridges — IAPD record.

This article is provided by Tiverton Wealth, LLC for general educational and informational purposes only. It does not constitute personalized investment, tax, or legal advice, and should not be relied upon as a substitute for advice from a qualified professional familiar with your specific circumstances. Tiverton Wealth, LLC is a fee-only Registered Investment Advisor providing services only in jurisdictions where it is properly registered or exempt from registration. Investing involves risk, including the possible loss of principal, and no strategy can guarantee a profit or protect against loss. Past performance is not indicative of future results. Please consult with a qualified financial, tax, or legal professional before making decisions based on this content.

Frequently Asked Questions

Should I stop withdrawals from my retirement accounts during a market decline?

Stopping withdrawals entirely often isn’t practical, but changing where they come from may help. Drawing from cash or bonds while stocks are down is designed to avoid selling equities at depressed prices. The right approach depends on your reserves, income sources, and tax situation.

What is sequence-of-returns risk?

Sequence-of-returns risk is the risk that poor market returns occur early in retirement, when you’re withdrawing money. Selling investments during a decline to fund spending can leave fewer assets to benefit from any later recovery, which can affect how long your savings last.

Is a market decline a good time for a Roth conversion?

It can be worth evaluating. Converting while account values are down produces a smaller taxable amount for the same number of shares, as described in IRS Publication 590-A. Because conversions can’t be undone, the decision should be reviewed against your current and future tax brackets with a qualified professional.

Does a market decline lower my required minimum distribution this year?

Generally, no. Under IRS Publication 590-B, your RMD is based on your account balance as of the prior December 31. A decline this year typically affects next year’s RMD calculation instead.

How can a fee-only fiduciary advisor help during a market downturn?

A fee-only fiduciary advisor can help you review whether your plan still supports your goals, evaluate withdrawal and rebalancing decisions, and identify tax planning opportunities, while being compensated only by you rather than through product commissions. You can learn more at tivertonwealth.com.