The Market Drops 25% the Year You Retire. Now What?

Most people spend decades building a portfolio, then retire right into a bad market. That combination, selling shares at a loss to cover living expenses while the account is still falling, is called sequence-of-returns risk. It is one of the least-discussed ways a retirement can unravel, even for people who did everything right. If you own a home in Travis, Williamson, or Hays County and you are 62 or older, you likely have a significant asset sitting outside your brokerage account. A HECM line of credit can turn that asset into a sequence-of-returns hedge, and most financial planners are still not talking about it.

What Sequence-of-Returns Risk Actually Means

Here is the core problem in plain numbers. Say you retire with $800,000 and plan to withdraw $48,000 a year (a 6% withdrawal rate). If the market drops 30% in year one, your account is now around $560,000 before you even take your first withdrawal. Now you are pulling $48,000 from a much smaller base. The account may never fully recover, even if markets bounce back strongly in years two and three.

The damage is not the down market itself. It is selling depressed assets to fund living expenses. Stop the forced selling, and the math changes dramatically.

How the HECM Line of Credit Works as a Buffer

A Home Equity Conversion Mortgage (HECM) is an FHA-insured reverse mortgage product available to homeowners 62 and older. One option inside the HECM is a line of credit you can draw from at any time, for any reason, with no monthly mortgage payment required.

Here is what makes it unusual as a planning tool: the unused portion of a HECM line of credit grows over time at a rate tied to current interest rates. This is not investment growth. It is a contractual increase in your available borrowing capacity, regardless of what your home's market value does.

The HECM line of credit is one of the only financial instruments where the available credit can grow larger over time whether you use it or not.

In a down market, instead of liquidating stocks at a 25% loss, you draw from the HECM line to cover six to eighteen months of living expenses. You leave the portfolio alone. When markets recover, you resume normal withdrawals and let the line rebuild.

A Real-World Scenario in Lakeway or Westlake

Take a couple in their late 60s. Their home in Lakeway is worth $850,000 and is paid off. Their investment portfolio is $900,000. They retire in early 2026.

Using current HECM guidelines (which are set by HUD and adjusted periodically), they might qualify for a line of credit in the range of $300,000 to $400,000, depending on the youngest borrower's age and current interest rates. They set it up and do not touch it.

Markets drop 20% that fall. Instead of selling $50,000 worth of depressed equities, they pull $50,000 from the HECM line. The portfolio sits. Markets recover over the next two years. They repay nothing unless they choose to. There is no monthly payment required.

The house does the heavy lifting so the portfolio does not have to.

Who This Strategy Is and Is Not For

This is not a fit for everyone. A few honest filters:

  1. You need meaningful home equity, generally at least $400,000 in value with the property mostly or fully paid off.
  2. You need to plan to stay in the home. If you are moving to a smaller place in Cedar Park or Round Rock within two years, the setup costs likely do not make sense.
  3. Your heirs need to understand that the loan balance grows over time. The home is still part of the estate. Heirs can repay the HECM and keep the house, sell the house and keep any equity above the loan balance, or walk away with no personal liability because it is a non-recourse loan.
  4. This works best alongside a fee-only financial planner, not instead of one.

What the Research Says

Planning researchers Barry Sacks and Stephen Sacks published a peer-reviewed study showing that coordinating HECM withdrawals with portfolio downturns meaningfully extended portfolio longevity compared to portfolio-only strategies. That study has been cited in the Journal of Financial Planning. This is not fringe thinking. It is catching up to mainstream.

One Conversation Worth Having Before the Market Moves

The mistake I see most often is people waiting until the market has already dropped to ask about options. The HECM line of credit takes time to set up. It takes a counseling session (required by HUD), an appraisal, and a standard underwriting process. If you wait until you need it, you are already behind.

If you are a homeowner 62 or older in the Austin metro, or an adult child helping a parent think through retirement cash flow, this is a conversation worth having before conditions force your hand.

Want to walk through your numbers? Talk to Austen.

Austen Smith, NMLS #265697. Barton Creek Lending Group, NMLS #264320. This post is educational and does not constitute financial or tax advice. HECM loan terms depend on borrower age, home value, and current interest rates. Consult a qualified financial advisor before making retirement planning decisions.