Retiring at Highs, Planning for Lows

As I write this column, the S&P500 is hitting another all-time high. This trend isn’t unusual. Citi reports that since 1960, the S&P makes, on average, a new high about once every 14 trading days. Though this represents tremendous ongoing progress, it leaves many near-retirees with a nagging question: “What happens if I retire just before a bear market?”

Sometimes driven by fear, other times by pragmatism, this question pervades in our meetings with clients. After decades of saving and investing, retirement can change how investors feel about market declines. During a person’s working years, a bear market feels uncomfortable, but paychecks often continue. When the market isn’t dictating an investor’s income, they can ignore account statements until things get “better.” Wise long-term investors may even relish a bear market. After all, lower prices help them buy more shares at temporarily low prices.

But in retirement, the same decline feels very different. A portfolio is no longer a future resource but a necessary part of the household paycheck.

To address the investor who retires right before a bear market, consider a financial planning tool called sequence-of-risk-return (SORR). It sounds technical, but the idea is simple. Two retirees can experience the same average return over a long period and still have very different outcomes if one suffers poor returns early and the other suffers them later. A bad market in year 20 of retirement may be unpleasant, but a bad market in year one or two can be far more damaging because withdrawals occur while values are down.

That doesn’t mean a person should fear retirement simply because markets are near all-time highs. Over long periods, markets reach new highs because businesses grow earnings, productivity improves, dividends increase, innovation continues and the economy expands. If markets never reached new highs, long-term investors would have a much larger problem.

Still, the phrase “all-time high” can feel ominous, as if we’ve reached the edge of something we’re about to fall over. While it may feel scary, history reminds us that bear markets are part of a balanced story. New highs don’t prevent a bear market, nor do they predict one. Temporary market pullbacks are a normal “cost” of investing in (owning) productive businesses over time.

But what if we ignore the market’s all-time highs and simply address the question behind the question: “If markets decline, where will my spending money come from?”

Producing adequate income is the heart of retirement planning. During a recent interview, Ray Dalio discussed a key concept: the difference between money and wealth. Wealth is a number on a statement that may look reassuring at times, but it can’t be spent until it’s converted to income. At the grocery store, you must spend cash, not wealth.

Retirement income may come from Social Security, pensions, interest, dividends, rental properties, part-time work or the sale of investments. Most retirement plans involve some combination of these. The important point is that successful retirement isn’t simply about preserving a large number on a statement. It involves arranging income resources so they can reliably support life.

This distinction is critical during a bear market. If all spending must be funded by selling investments, a retiree may need to sell shares while prices are temporarily depressed. Those shares can no longer participate in any eventual recovery. A temporary dip isn’t inherently dangerous (or permanent), but the need to liquidate long-term assets at precisely the wrong time can be.

A simple way to reduce this risk is to keep a cash reserve equal to a few years of anticipated spending needs. That strategy won’t necessarily maximize returns, but it creates breathing room. If a bear market arrives shortly after retirement, a cash reserve can fund a family’s expenses without requiring the immediate sell-off of long-term investments.

This reserve should not expand into a permanent investment strategy. Holding too much cash for too long creates its own risk, especially in a retirement that may last 25–30-plus years. Inflation is the perpetual headwind we all face, slowly degrading cash’s purchasing power over time.

This leads to how dividend income and cash reserves can work together. Cash provides immediate breathing room. Growing dividends remind investors that their portfolio isn’t merely a balance on a statement but ownership in businesses capable of providing cash back. Neither tool eliminates SORR, but both can reduce the pressure to turn temporary market declines into permanent mistakes.

A few years of cash can’t guarantee a successful retirement. Nor will dividends, bonds, equities or any single tool. But properly arranged, these pieces support something every retiree needs: the ability to fund life today while allowing long-term assets to work for tomorrow.

Retirement has never been about spending a statement balance. It’s about converting a lifetime of accumulated wealth into the income and flexibility needed to live well.