Can You Still Retire on Time After a Market Crash? (Yes, Here's How)

​Picture this: You're 65, planning to retire next month with your PERS 2 pension, and suddenly the market drops 20%. Your supplemental retirement savings take a hit just when you need them most. If this scenario keeps you up at night, you're not alone. Market downturns near retirement can feel especially scary for public employees who rely on both their pension and personal savings for retirement security.
Core Principles for Market Recovery Near Retirement
When facing market volatility close to retirement, these fundamental principles can guide your decisions:
1. Time Horizon Matters More Than Age Your retirement could last 25-30 years, giving your investments time to recover even if you're close to retiring.¹
2. War Chest Strategy Building 5 years of investment withdrawals in high-quality short-duration bonds creates a buffer that lets growth investments recover without forcing sales during downturns.
3. Diversification Beyond Stocks Washington State employees have unique advantages with stable pension benefits that can reduce reliance on volatile investments.
4. Flexibility Creates Opportunity Having multiple withdrawal options gives you control during market stress.
5. Washington State Advantage DRS members have more predictable income streams than private sector retirees, allowing for different recovery strategies.2
Your 5-Step Recovery Strategy
Step 1: Assess Your Total Retirement Picture
Don't just look at your 457(b) plan balance. Calculate your complete retirement income:

• DRS pension benefit
• Social Security (use your actual statement, not estimates)
• Supplemental retirement savings (457b, IRA, Roth IRA, etc.)
• Other income sources (rental property, part-time work)

Step 2: Build Your War Chest with High-Quality Short-Duration Bonds
Create a 5-year buffer of investment withdrawals in high-quality short-duration bonds. This strategy protects you from being forced to sell stocks during market downturns.
How to calculate your war chest:

• Determine your annual withdrawal need from investments (total expenses minus pension and Social Security)
• Multiply by 5 years
• Invest this amount in high-quality short-duration bonds

Step 3: Maximize Your Pension Timing
If you have worked 30+ years in a non-LEOFF position you can retire with full benefits at 62 with 30+ years of service or 65 with 20+ years of or earlier with reduced benefits. During market downturns, consider:

• Delaying retirement by 1-2 years if possible (your pension grows significantly)
• Working part-time in retirement to reduce withdrawal pressure
• Coordinating with Social Security timing for maximum benefit

Step 4: Use Tax-Smart Withdrawal Strategies
Market downturns create unique tax opportunities, especially when combined with your war chest strategy:

• Roth conversions when stock values are low (use war chest for living expenses)
• Tax-loss harvesting in taxable accounts
• Strategic rebalancing (sell bonds high, buy stocks low)

Step 5: Replenish Your War Chest During Recovery
As markets recover and your growth investments increase in value:

• Rebalance back to bonds when stocks are high
• Maintain your 5-year buffer by selling appreciated assets
• Consider extending to 6-7 years if you're very conservative, or have a higher reliance on your investments for monthly/annual spending needs.

This disciplined approach forces you to sell high and buy low automatically.
Case Study: Tom's Market Downturn Recovery
Tom, a 60-year-old PERS Plan 2 member, was planning to retire at 62 and wanted to protect against potential market downturns. With $500,000 in his 457(b) plan, he proactively built his war chest two years before retirement. His pension will provide $3,200 monthly, and Social Security will add $2,000. He needs $7,000 monthly total, so he requires $1,800 monthly ($21,600 annually) from investments.
Tom's proactive war chest strategy:
·       War chest built: $21,600 × 5 = $108,000 moved to short-duration bonds
·       Growth investments: $500,000 - $108,000 = $392,000 remained in growth investments (equities)
·       The downturn: Market dropped 25%, but only his growth investments were affected
·       Result: His $392,000 growth portfolio dropped to $294,000, but his $108,000 war chest remained stable
Why Tom's strategy worked:
·       He could retire exactly as planned without touching depressed stock investments
·       His war chest provided 5 years of withdrawals while growth investments recovered
·       He avoided the emotional stress of watching his entire portfolio drop right before retirement
·       After 3 years, his growth investments recovered to $400,000, and he rebalanced by selling stocks to replenish his war chest
Tom's proactive approach shows why building your war chest before you need it is crucial. Rather than scrambling during a market downturn, he had a predetermined plan that let him retire confidently regardless of market conditions.
Your Action Plan

1. Calculate your annual withdrawal need from investments
2. Build your 5-year war chest using high-quality short-duration bonds
3. Review your pension timing options with DRS
4. Consult with a fiduciary financial advisor familiar with Washington State benefits
5. Create a rebalancing schedule to maintain your war chest during recovery

Remember, market downturns near retirement aren't ideal, but they're not retirement killers either. Your DRS pension provides stability that many retirees don't have. Combined with a properly constructed war chest, you can weather market storms without compromising your retirement plans.
Sources and Resources

1. Morningstar Research on Retirement Time Horizons
2. DRS Retirement Planning Resources

 

Seth Deal