Retirement Income in a Bear Market: How to Keep Paychecks Steady

A bear market is usually defined as a decline of 20% or more from a recent high. For someone still working and saving, a downturn can be uncomfortable but manageable: new contributions buy shares at lower prices, and there is time to recover. For someone who has just stopped working and is living off a portfolio, the same decline can be far more consequential.

The reason is simple. A retiree is selling assets every month to pay bills. Selling while prices are down locks in losses and leaves fewer shares to participate in any recovery. This article explains that risk and the strategies we use in our retirement planning process to help clients keep income steady through a downturn.

Why timing matters: sequence-of-returns risk

Sequence-of-returns risk is the danger that poor returns arrive in the first years of retirement, while withdrawals are under way. Two retirees can earn the same average return over 25 years and end up in very different places, depending only on the order in which good and bad years arrive.

If losses come early, withdrawals take a larger bite out of a shrinking balance, and the portfolio has less capital left to benefit when markets recover. If the same losses come late, after years of growth, the damage tends to be smaller.

In retirement, the order of returns can matter as much as the average return.

None of the strategies below can eliminate this risk. They are designed to reduce the chance that you are forced to sell growth assets at depressed prices to cover living expenses.

Build a cash and bond "bucket" before you need it

A bucket strategy separates money by when it will be spent.

During a bear market, you draw from the cash and bond buckets and leave the growth bucket alone, giving it time to recover. When markets are strong, you refill the safer buckets by trimming gains.

The cost is real: holding several years of spending in cash and bonds may lower the portfolio's long-term return, and a very long downturn can outlast the reserve. The right size depends on your other income, your spending and how much volatility you can tolerate.

Make withdrawals flexible

A fixed withdrawal that rises with inflation every year is simple, but it ignores what the market is doing. Flexible approaches adjust spending to conditions and can meaningfully improve a portfolio's odds of lasting.

• Skip the raise. In a down year, hold withdrawals flat rather than increasing them for inflation.
• Separate needs from wants. Keep essential spending steady and trim discretionary items, such as travel or large purchases, until the portfolio recovers.
• Use guardrails. Set upper and lower limits: if the portfolio falls enough that your withdrawal rate crosses a threshold, spending is cut by a set amount; if it rises enough, spending can increase.
• Choose which account to tap. Drawing from taxable, tax-deferred or Roth accounts in a deliberate order can help manage taxes during a downturn. Our tax planning work coordinates this with your CPA.

The downside: your income can vary from year to year. That is one reason an income floor matters.

Create an income floor for essential expenses

An income floor is reliable income, independent of the stock market, that covers basic living costs. When the essentials are covered, a bear market becomes a question of discretionary spending rather than of paying the mortgage.

Social Security timing

Social Security is inflation-adjusted lifetime income; the 2026 cost-of-living adjustment is 2.8%. For anyone born in 1960 or later, full retirement age is 67. Claiming at 62 permanently reduces the benefit by 30%, while delaying past full retirement age adds 8% per year until age 70.

Delaying can raise the floor significantly, which may be especially valuable for the higher earner in a married couple, since that benefit can continue as a survivor benefit. The trade-off: you may need to draw more from the portfolio in the meantime, and delaying pays off only if you live long enough. Federal employees should also coordinate this decision with their FERS pension and TSP; see our federal employee planning page.

Pensions and annuities

A pension, if you have one, is part of the floor. Some retirees add an annuity to fill a gap. Each type comes with trade-offs:

All annuity guarantees depend on the claims-paying ability of the issuing insurance company. They should fit within your broader insurance planning. An annuity is not right for everyone, and it is rarely wise to put most of your savings into one.

Rebalance with discipline

Rebalancing means bringing your portfolio back to its target mix. In a bear market, stocks shrink as a share of the portfolio. Rebalancing involves selling some bonds or cash and buying stocks at lower prices, which is uncomfortable but consistent with a long-term plan.

It works best with written rules set in advance, such as rebalancing when an asset class drifts a set number of percentage points from its target. For retirees, rebalancing is also the mechanism for refilling the cash bucket after markets recover. The risk is that prices can keep falling after you rebalance, so it should be done gradually and only with money not needed for near-term spending.

RMDs, which begin at 73 for most retirees in 2026, can complicate this. You can often satisfy an RMD by transferring shares "in kind" to a taxable account rather than selling at a low price, keeping the investment while meeting the requirement.

Avoid panic selling

The most damaging move in a bear market is often an emotional one: selling everything after a sharp drop, then waiting on the sidelines while the recovery begins. Some of the strongest market days have historically occurred close to the worst ones, and missing them can be costly.

• Revisit the plan, not the headlines. Ask whether your income needs have changed, not whether the market will fall further.
• Know your reserve. Knowing how many months of spending sit in cash and bonds can make volatility easier to tolerate.
• Make changes deliberately. If your risk tolerance has genuinely changed, adjust the allocation in stages with your adviser rather than all at once.

Hedging tools are covered in our separate article on portfolio protection; here the goal is reliable income, so decisions are not made under pressure. Our investment management process is built around that same principle.

Frequently asked questions

How much cash should a retiree hold going into a bear market?

Many retirees keep one to two years of planned withdrawals in cash, with several more years in bonds. The right amount depends on your guaranteed income, spending and comfort with volatility. Holding too much cash can reduce long-term growth.

Should I start Social Security early if the market is down?

Not automatically. Claiming early locks in a permanently smaller benefit. In some cases, drawing on a cash or bond reserve for a few years while delaying Social Security may be a better trade-off, but it depends on your health, marital status and other income.

Is it a mistake to change my allocation during a bear market?

Selling in reaction to a decline often locks in losses. Rebalancing, or adjusting gradually because your circumstances changed, is different.

Do annuities protect retirement income in a downturn?

Some annuities are designed to provide income that does not depend on market performance, but they carry costs, surrender charges, limits on growth and insurer credit risk. They can be one part of an income floor, not a complete solution.