A Market Crash the Year You Retire Breaks More Than Your Success Rate

The Number Everyone Shows You, and the Part It Leaves Out

Run a crash test on most retirement tools and you get one output. A success rate. Maybe it drops from 91% to 73% once a downturn gets added to the model. That number is real and worth paying attention to. But it treats the crash like a single event that either sinks the plan or does not.

In practice, a crash the year you retire sets off a chain of smaller decisions. How your cash bucket gets refilled. Whether a planned Roth conversion still makes sense that year. Those decisions do not show up in a success percentage. They show up in the actual year the crash happens, and only if you can see that far into the plan.

What a Crash Does to Your Bucket Refill

Say you retire with a cash bucket built to cover a few years of spending. It is sized exactly for a downturn like this. That part works as intended. Bucket one absorbs the shock and pays your bills while the market recovers. The part that catches people off guard comes later, once bucket one runs low and needs to be refilled.

In a normal year, refilling bucket one means selling some of bucket two, the intermediate bonds and dividend stocks, at whatever they happen to be worth. If the market had a good year, that sale is easy and barely dents your long-term growth. If the market just dropped 25% or 30%, the same refill means selling more shares to raise the same amount of cash. Those shares are gone. They cannot recover along with the rest of the market once it turns back up.

The bucket strategy is built to prevent you from selling stocks at the bottom to cover your spending. It does not automatically prevent you from selling stocks at the bottom to refill the bucket that protects your spending. That second sale still has to happen eventually. When it happens matters just as much as whether bucket one existed in the first place.

What a Crash Does to a Roth Conversion

A Roth conversion moves money from a traditional account into a Roth account. You owe income tax on the amount moved that year. The tax is based on dollars, not shares. When the market is down, the same dollar amount buys more shares inside the Roth. That is the entire case for converting during a downturn. It is a real one.

It only works cleanly if the cash to pay that tax bill comes from somewhere separate from the investments you are converting. If your regular retirement spending is already pulling hard on bucket one because of the same crash, there may be no clean source left for the conversion's tax bill. The fallback is selling more shares elsewhere to raise the cash. That happens at the same depressed prices the conversion was supposed to take advantage of. At that point the conversion is not free upside anymore. It is a second forced sale in a year that already had one.

None of this means you should skip converting during a downturn. It means the outcome depends on a decision made long before the crash, not during it. Either you set aside a separate cushion ahead of time to pay conversion taxes. Or you decide in advance that conversions pause during a down year until the cushion refills.

The Same Portfolio, Two Different Years

Take a simple example. Call him Marcus, 58 years old, four years from a planned retirement at 62. He has $1.4 million spread across a 401k, a Roth IRA, and $180,000 in a taxable brokerage he has been building specifically to fund buckets one and two once he retires.

Picture a 30% market drop landing when Marcus is 60, still two years from retirement. He is still working. He is still contributing every paycheck, buying shares at the lower prices instead of selling anything. By the time he actually retires two years later, most of the recovery has already happened, and the extra shares he bought during the downturn are worth more than what he paid for them. The crash barely leaves a mark on his plan.

Now move the same crash two years later, to the year Marcus actually retires instead. He has stopped contributing. He is drawing $70,000 a year from his accounts to live on. Bucket one starts covering that spending immediately, exactly as designed. A year or two in, bucket one needs refilling, and that means selling bucket two holdings that are still down. He also had a Roth conversion planned for his first low-income year of retirement, before Social Security starts. Bucket one is already stretched thin from the crash. There is no separate cash left to cover the conversion's tax bill. The conversion either gets skipped for the year, or it gets paid for by selling more of the same depressed shares.

Same portfolio. Same $1.4 million. Same 30% crash. The only difference between the two versions of Marcus is which year the crash happened to land in, and that single difference is what actually decided the outcome.

Why This Has Almost Nothing to Do With Which Fund You Hold

A large cap value fund can drop 25% in a bad year. A total market index fund can drop 25% in the same year. Switching between them does not change whether the crash lands two years before Marcus retires or the year he actually does. What changes the outcome is whether bucket one was sized for that exact risk, and whether the conversion plan had its own separate source of cash, regardless of which fund happened to be falling at the time.

Not Set and Forget

Shifting toward a more conservative mix as retirement gets closer helps, and it is worth doing. It does not remove the timing risk entirely, because even a conservative portfolio can still have a down year in the exact window that hurts the most.

The real protection is not picking the right mix once and moving on. It is checking, as retirement gets closer, whether bucket one actually covers what a bad year would demand of it, and whether the conversion plan has a cash source that does not depend on the same accounts a crash would already be draining. That check is worth repeating every year retirement gets closer. Four years out and one year out call for different answers, even with the exact same portfolio.

This is why Risk Analysis on ThunderHarbor runs real historical sequences instead of a single average return, and why it reads from the same numbers as Bucket Strategy and Roth Strategy instead of living on its own. A success percentage tells you the odds. Seeing what a bad year actually does to your bucket refill and your conversion plan, in the year it happens, tells you what to do about it.