What happens if the market drops right before you retire

This is called sequence-of-returns risk, and it's one of the more counterintuitive facts in retirement planning: the average return a portfolio earns over a retirement matters less than the order those returns show up in — specifically, what happens in the first few years after someone starts withdrawing money.

The reason is mechanical. Someone who is still adding money to a portfolio benefits from a downturn early on — they're buying more shares at lower prices. Someone who has started withdrawing money does the opposite: selling shares in a downturn to fund living expenses locks in losses and leaves fewer shares left to recover when the market eventually does. A downturn in year one or two of retirement can do lasting damage that the identical downturn in year twenty would not.

A few approaches advisors commonly discuss to manage this, without eliminating the risk entirely:

• A cash or short-term bond buffer. Holding one to a few years of expenses in something that doesn't fluctuate with the stock market means a downturn doesn't force selling stock at a low point — spending can come from the buffer instead while the portfolio recovers.
• Flexible spending. Retirees who can reduce discretionary spending in a down year — rather than withdrawing a fixed amount regardless of market conditions — reduce how much damage a bad sequence can do.
• Adjusting the glide path into retirement. Some advisors reduce equity exposure in the years immediately before and after retirement specifically to reduce this risk, then increase it again later.

There's no way to know in advance whether a downturn will happen to land in the first years of a specific retirement — that's the nature of the risk. What's controllable is having a plan for that scenario in place before it happens, which is a core part of what a retirement income plan is for.