When markets drop sharply, the instinct is to pull back. For retirees relying on portfolio withdrawals, those instincts collide with the real risk of locking in losses that could permanently damage long-term financial security.

A down year isn't just stressful. It can throw off even the most carefully planned retirement income strategy. Knowing how to adapt without derailing your financial future requires more than just watching market headlines. You must also understand how tax law changes, including those under the One Big Beautiful Bill Act (OBBBA), could affect your decision-making.

This is the moment when flexibility becomes your most valuable tool.

Sequence risk becomes real

The most significant danger of withdrawing during a market downturn is sequence-of-returns risk. That’s the risk that poor market performance in the early years of retirement, coupled with portfolio withdrawals, will cause you to deplete your savings too quickly.

If your portfolio drops 20% and you continue withdrawing 4% of the original balance, that withdrawal now represents 5% of the reduced portfolio value. That accelerates the drawdown. Even if markets rebound later, you have less capital working for you.

This doesn’t mean you should never withdraw during a down year. It just means you need a more adaptive strategy.

Revisit your spending targets

In a bad year, the most straightforward solution is to reduce spending, even temporarily. That’s easier said than done, especially if your withdrawal fund covers basic living expenses.

Still, trimming discretionary expenses, travel, home upgrades, and luxury purchases can reduce the pressure on your portfolio. Even a 10% cut in annual withdrawals during a negative return year can reduce the risk of outliving your assets.

If you’ve already built a flexible withdrawal plan with guardrails, like the Guyton-Klinger decision rules, this may be the time to follow those rules and hold back. If not, it may be time to revisit your plan.

Tap cash reserves

If you have a cash bucket or short-term bond ladder, now is the time to use it. Ideally, retirees maintain one to two years of spending needs in low-volatility, liquid assets.

Using these reserves allows you to avoid selling depressed equities and gives your portfolio time to recover. Consider this an emergency valve, a valuable buffer when markets decline sharply, not something to lean on yearly.

If you don’t have a cash buffer, this experience may encourage you to build one once markets stabilize.

Take a fresh look at Roth conversions

In years when your portfolio is down, your taxable income may be lower. That can open up a unique opportunity: converting pre-tax assets to Roth at a lower tax cost.

Because the value of your traditional IRA or 401(k) is down, you can convert a larger percentage of your account while generating the same amount of taxable income. This moves future growth into a tax-free account when prices are low.

The OBBBA made the TCJA’s lower income tax brackets permanent, eliminating the scheduled sunset after 2025. It also left Roth conversion rules intact. For those considering strategic Roth conversions, the permanency of current rates offers a more stable planning environment, though timing based on income levels and market values still matters. Roth conversions may be especially compelling in a low-income year or after a market drop.

Manage tax brackets carefully

In a market downturn, reducing withdrawals to the bare minimum is tempting. That could mean taking only required minimum distributions (RMDs) or skipping portfolio withdrawals altogether.

But this can backfire if it causes your income to drop too low, leaving valuable low tax brackets unused. In future years, you may face higher rates on mandatory withdrawals.

Instead, consider using those lower brackets proactively. For example, if you’re in the 12% or 22% bracket this year, it may be worth harvesting income up to the top of that bracket. This might mean realizing some capital gains or doing partial Roth conversions.

Under the OBBBA, the capital gains tax structure remains intact, with the 0%, 15%, and 20% tiers for long-term capital gains still based on your taxable income. Innovative income harvesting can allow you to lock in 0% or 15% capital gains rates before market recoveries push you higher.

Rebalance wisely

When equities fall, your portfolio may be underweight stocks relative to your target. That’s when disciplined rebalancing matters most.
Instead of selling stocks, you might use withdrawals to trim from bonds or cash, which likely held their value better. This keeps your equity exposure intact and may allow you to benefit more fully when markets rebound.

If you’re in a taxable account, rebalancing may trigger capital gains. Here again, a down year might work in your favor. Realizing losses through tax-loss harvesting can offset gains, or even reduce your ordinary income by up to $3,000.

Tax-loss harvesting gains new value

Big market drops often generate tax-loss harvesting opportunities. Selling losing positions to capture a tax deduction, then reinvesting in similar, but not substantially identical, investments, lets you maintain exposure while improving your tax outcome.

These harvested losses can offset capital gains this year and in future years. They also offset up to $3,000 of ordinary income annually. There’s no expiration date on carry-forward losses.

Consider alternate withdrawal sources

You might not have to rely solely on portfolio withdrawals if you're old enough to take qualified distributions.

For example, a home equity line of credit (HELOC) could be a short-term alternative in extreme years. Some retirees use a cash value life insurance policy or reverse mortgage line of credit as a last resort buffer.

Before tapping these sources, assess interest costs, potential impact on Medicaid eligibility, and long-term sustainability.

For those with donor-advised funds (DAFs), charitable giving can continue without impacting portfolio withdrawals. Since DAFs are already funded with prior gifts, you can continue supporting causes you care about without increasing your withdrawal rate.

Reevaluate sustainable withdrawal rates

It’s worth questioning whether your long-term withdrawal rate is still appropriate in volatile years.

A dynamic withdrawal strategy, like the “guardrails approach, "that adapts to market performance and life changes may offer more resilience.

These strategies tie spending more directly to portfolio values, reducing the odds of overspending during market downturns.

Use the OBBBA as a timing signal

The One Big Beautiful Bill Act made several changes that may influence your retirement withdrawal decisions. One of the most important issues for high-net-worth individuals is the scheduled increase in the federal estate tax basic exclusion amount to $15 million per person starting in 2026, indexed for inflation using 2025 as the base year.

If your estate is likely to exceed that threshold, spending more from your portfolio in the next two years or gifting more aggressively could reduce future estate tax exposure. That includes qualified charitable distributions (QCDs) from IRAs for those 70½ or older, which don't count as income but satisfy RMDs.

Although OBBBA did not alter ordinary income or capital gains tax brackets as initially proposed, it made the TCJA-era brackets permanent, preserving today’s low-rate environment and shifting the estate planning landscape. This may support more front-loaded withdrawals or strategic gifts in years when portfolio values are depressed.

Final thought

Withdrawing during a down market doesn’t have to be a disaster. The key is to adapt, not overreact.

That might mean lowering withdrawals, harvesting tax losses, converting to Roth, or drawing from cash reserves. It might mean rebalancing with care and being opportunistic about low-income years.

The right strategy will depend on your goals, tax bracket, and risk tolerance. Work closely with your financial advisor or tax professional to design a flexible plan that accommodates market cycles and policy changes like the OBBBA.

Surviving a market downturn starts with thoughtful, steady decisions. Thriving through one requires a plan that’s both resilient and responsive.

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