How to protect your retirement savings from a market crash

Most investors understand that markets move in cycles. Periods of economic expansion are often followed by periods of contraction; still over long periods, markets have historically delivered positive returns.

However, long-term trends do not eliminate short-term volatility.

The dot-com crash in the early 2000s wiped out trillions of dollars in market value. The Global Financial Crisis in 2008 saw global markets fall sharply within months. Even the early months of the COVID-19 pandemic triggered one of the fastest market declines in modern history.

For younger investors, these events may represent temporary setbacks. With decades ahead, time often allows portfolios to recover.

However, the situation becomes more complicated as retirement approaches.

At this stage, investors typically have the largest portfolios they have ever accumulated. At the same time, they also have fewer years remaining to recover from significant market losses.

This combination means that the timing of a downturn can matter just as much as the size of the downturn itself.

The overlooked risk in retirement planning: Sequence of returns

One of the most important but least understood concepts in retirement planning is sequence-of-returns risk.

This refers to the risk that poor investment returns occur shortly before or shortly after retirement begins.

Many investors focus on average returns over long periods. Yet the order in which those returns occur can significantly affect retirement outcomes.

Consider two investors who both achieve an average annual return of 6% over 25 years:

• On paper, their long-term performance appears identical.
• However, the results may differ significantly depending on when market gains and losses occur.
• If market gains occur early and losses occur later, the portfolio may still remain relatively healthy.
• But if large losses occur just before retirement, the investor may be forced to withdraw funds from a reduced portfolio. This can permanently reduce the amount of capital remaining to generate future returns.
• Over time, this may shorten the lifespan of retirement savings.

For this reason, many financial experts pay particular attention to the final years leading up to retirement.

Why the years before retirement are particularly sensitive

Financial experts sometimes refer to the final decade before retirement as the retirement risk zone.

During this stage, two important conditions occur simultaneously.

• First, investors have accumulated substantial savings over many years.
• Second, they have limited time to recover from major market downturns.

If markets decline sharply during this period, the portfolio may not have sufficient time to recover before withdrawals begin.

This is why retirement planning often involves gradually shifting the focus from pure growth toward capital preservation and stability.

The Singapore context: Retirement adequacy and CPF

In Singapore, retirement planning is supported by a combination of personal savings, investments and the Central Provident Fund (CPF) system.

CPF LIFE provides lifelong monthly payouts from age 65 onwards, helping to ensure that Singaporeans do not outlive their retirement income.

However, CPF alone may not be sufficient to maintain the lifestyle many households expect during retirement.

According to estimates published in Singapore retirement adequacy studies, a typical retired household may require between S$1,300 and S$2,000 per month for basic expenses, with higher amounts needed for more comfortable lifestyles.

For many households, personal investments and savings therefore play an important role in supplementing CPF payouts.

This is where market volatility can have a significant impact. If retirement portfolios experience sharp losses shortly before retirement begins, the gap between expected retirement income and actual income may widen.

Understanding how to manage this risk is therefore an important part of long-term financial planning.

3 common strategies investors use to protect retirement savings

Although market crashes cannot be predicted or avoided entirely, investors can take steps to reduce their impact on long-term retirement plans.

Financial experts often recommend a combination of strategies.

1. Gradually adjusting investment allocations

One common approach involves gradually reducing exposure to highly volatile assets as retirement approaches.

Younger investors may maintain portfolios heavily weighted toward equities because they have time to withstand market fluctuations.

As retirement approaches, some investors shift part of their portfolio into more stable assets such as bonds or cash equivalents.

This process, sometimes referred to as de-risking, helps reduce the potential impact of sudden market declines during the years when retirement savings may soon be needed.

2. Maintaining a buffer for short-term spending

Another widely used strategy involves maintaining a pool of relatively stable assets that can fund several years of retirement expenses.

This buffer allows retirees to avoid withdrawing funds from market investments during temporary downturns.

For example, some retirement strategies aim to maintain three to five years of expected spending in relatively stable assets.

If markets decline temporarily, the investor can rely on this buffer until markets recover.

3. Diversifying beyond traditional investment assets

Some investors also diversify beyond traditional investment portfolios.

Certain financial structures operate differently from direct market investments.

For example, some permanent life insurance policies accumulate cash value over time and credit interest based on the performance of market indices.

One example is indexed universal life (IUL).

In an indexed universal life policy, interest credited to the policy's cash value may be linked to the performance of a market index such as the S&P 500. At the same time, the policy typically incorporates mechanisms that protect against negative index returns in years when markets decline.

Because of this structure, some individuals use such policies as one component of a broader financial strategy.

They are not designed to replace traditional investments. However, they may complement diversified portfolios by offering exposure to market-linked growth while incorporating features designed to limit downside risk.

A worked scenario: how timing can affect retirement outcomes

Consider a hypothetical example:

• Mr Tan, age 60, plans to retire at age 65. Over the years he has built a retirement portfolio worth S$1.2 million, invested primarily in equities and balanced funds.
• His retirement plan assumes that he will withdraw S$50,000 per year to supplement CPF LIFE payouts.
• Now imagine that global markets decline by 30 percent just two years before his planned retirement.
• His portfolio value falls from S$1.2 million to approximately S$840,000.
• If he proceeds with his retirement plan and withdraws S$50,000 annually, the withdrawals represent a much larger percentage of the remaining portfolio.
• This increases the likelihood that his retirement savings may be depleted earlier than expected.

However, if Mr Tan had structured his retirement plan differently, the outcome might be more resilient.

For example, he may have maintained several years of spending in stable assets or diversified part of his financial plan into structures less directly exposed to market volatility.

Such approaches cannot eliminate risk entirely. However, they may help reduce the financial stress created by poor market timing.

Building resilience into a retirement strategy

Protecting retirement savings is not simply about avoiding market volatility.

Instead, it involves building a financial plan that can withstand different market environments.

Many investors achieve this by combining several approaches.

These may include maintaining diversified investment portfolios, holding stable assets for near-term spending needs and incorporating financial structures that operate differently from traditional investments.

The objective is to ensure that retirement plans remain sustainable even if markets experience temporary periods of volatility.

The bigger lesson for long-term investors

Market downturns are a natural part of investing.

Over long periods, markets have historically recovered and continued to grow.

However, the timing of those downturns can have a meaningful impact on retirement outcomes.

A market decline early in one's career may represent an opportunity to continue investing at lower prices.

A market crash shortly before retirement can feel very different.

That is why retirement planning is not only about maximising returns.

It is also about ensuring that financial plans remain resilient during the moments when market volatility matters most.

By understanding sequence-of-returns risk and planning accordingly, investors can take practical steps to protect their retirement savings and maintain confidence in their long-term financial future.

Written by: Great Eastern Lifepedia team