What to Expect If Markets fall by 30% in 2025: A Retirement Asset Comparison

By Paddy Delaney QFA RPA APA, Director of Informed Decisions Financial Planning

Planning for, and subsequently living (!) a dignified and choice-filled retirement is the biggest financial goal many of us have, or will have. It’s also a journey of uncertainties, and one of the biggest uncertainties is market volatility, both positive and negative.

We have experienced such positive market growth in the past 2 years in particular.

Below performance chart is of an iShares Global Developed Market Index. It tracks the largest and best equities/companies across the world. Given it's recent surge, North America makes up over 70% of such an index, which is another day's work! The point here is that this Global Equity Fund (which is a proxy for global equities) has returned just over 50% from Jan 2023 to December 2024! That is 22.5% annualised return, for the past 2 years. In the event that you aren't sure if that is good or only OK, it's bloody massive!

While it is nice to see, and very welcome, we owe it to our future selves and our future peace of mind to be reminded that it is not the norm, this will not continue for ever, and returns will most definitely revert to the mean at some point in the future.

Just as if the market was down 50% over the past 2 years, we'd be well served to remind ourselves that this is not the norm either - this time is not different, things will turn and revert to the mean at some point in the near future.

A Market Premortem

So, in the interest of being prepared financially and mentally :), let's explore the impact of the stock market having an illustrative 30% decline in 2025. This is not a prediction of market mayhem this year, it's a premortem to allow us consider what it might mean for us, how we might or might not react, in order to deliver better outcomes for you.

Massive corrections usually stem from a totally surprise epicenter (Covid - total surprise / 2008 Sub-Prime Loans - total surprise / September 2011 - total surprise etc. etc.). If you read the 'news' you will see all sorts of threats and potential issues (this is always the case in the 'news' dear reader!). It will likely be something completely left-field that will cause the next massive correction, whenever that day will come. But as sure as God made little apples, a correction will come. It was funny in a not funny way to see the markets fall c1% on opening last week, caused by a really positive Jobs Report in the USA. Why the hell did that happen? Because, the employment growth positive meant that the FED were less likely to cut interest rates, which would have eased consumer strain, which would have benefited and lifted 'the market'! You really can't predict anything here folks.

The 'how' of the next significant correction doesn't really matter in my view. What really matters is specifically how it could impact your retirement assets and income.

Lets look quickly at a few scenarios for someone that has accumulated or accumulating heavily towards a dignified retirement lifestyle......

Accumulating Pension, More Than a Few Years From Retirement & Pension Draw-Down

If you years from retirement, and you and your company or employer are saving/investing into a pension regularly, you really should be hoping for a massive market correction! Really.

Currently, you are buying 'units' of a fund every month at relatively high prices (50% higher than 2 years ago potentially!). If you were buying tins of beans, which you would sell and eat in 20 years, would you rather them be cheap or dear right now, relative to 2 years ago? You'd want them cheap, and you'd want them to accumulate in value between now and when you start selling and eating them.

Global Equity markets are the same. You want them to fall in value now, at least temporarily, while you are buying and accumulating them. Of course, it means the value of all the ones you already own will fall in value, which won't be great to look at, but what difference does that make to you right now? None.

Accumulating Pension, Close To Retirement & Pension Draw-Down

If you close to or at the point of retirement (and more specifically, the point of actually drawing the pot), you want the values to keep rising, particularly if you are planning to buy an Annuity. Reason being, when you buy an Annuity, you convert the entire pot (usually) from equity, or whatever you invested your pension in, to cash and hand that cash to the insurance company on a particular day - so you really can't afford to wait for the market to recover etc. Hence, many will move to 'defensive' assets to avoid a last minute collapse if buying Annuity.

If buy an ARF however, the time horizon is very different. Sure, you'll generate the Tax Free Lump Sum potentially, but the remaining pot of pension will remain invested in some form for the rest of your life, unless you convert it to an Annuity in future. Therefore, a temporary market decline in this imminent-ARF-scenario is much less of a concern.

I analysed specifics of ARF vs Annuity in a previous Blog if you'd like to read it!

Already Retired, Drawing Income via an Annuity

The primary advantage of an Annuity is that you never have to think about market declines. You have to give up potentially huge benefits for that pleasure of course, but that is the pleasure of Annuities - market declines do not impact your pension income (unless the market declines led to the terminal demise of your Annuity guarantor, but that's just me being facetious, sorry!)

Seriously, if you have an Annuity, you are getting the same income, no matter what the markets do. So if markets go up, you don't get an increase, and if markets go down, you don't get hit with a decrease. Simply, pain-free, worry-free. As you were!

Already Retired, Drawing Income From an Approved Retirement Fund

Lets take the example of you having an Approved Retirement Fund (ARF) with an initial balance of €1 million, from which you are taking an annual income draw-down of 5%.

An ARF is a flexible investment-based retirement vehicle of course. You retain ownership of your funds and can adjust your withdrawals to suit your needs and preferences (within Revenue ARF rules), but you are also exposed to market volatility. Let’s examine the potential impact of a 30% market decline in 2025.

Pre-Decline Balance and Income:

• Balance: €1,000,000
• Annual Income Draw-Down: €50,000 (5%)

Post-Decline Scenario:

A 30% market drop would reduce the value of the ARF by €300,000, leaving a new balance of €700,000. If you continue to withdraw €50,000 annually, this will represent approximately 7.1% of the remaining balance at that time. In anyone's book, this is a significant increase (50%) in the 'withdrawal rate'. Over time, this would accelerate the depletion of your fund, particularly if markets do not recover quickly. Historical average is c1.5 years from a 30% decline, depending on portfolio composition.

Considerations:

• Markets typically recover over time, but the sequence of returns matters greatly. If the decline occurs early in your retirement, and you keep drawing that illustratory 7% per year, the combination of withdrawals and reduced capital remaining in the ARF would hinder recovery. The overall impact is to potentially deplete your ARF earlier than anticipated
• Flexibility: You could reduce your draw-down temporarily to preserve capital. As we know, if you are under 70, the minimum you are allowed to draw from a €1m ARF is 4%. It would be a large reduction to make, and not something we would encourage unless necessary. But, in theory you could draw €28,000 (4% of 700k) instead of the previous €50,000 for a period. Assuming you have some set aside, you could use some of your other pots of cash/deposits to subsidise living, until such time as the ARF recovers and you return to the plan
• Guardrails: Majority of clients we work with, operate a guardrail approach - where there is a clearly defined and agreed plan to navigate market movements when invested via ARF. And it's purpose is to ensure that the investor and owner of the ARF gets to enjoy a reliable recurring monthly income. But also that they get some extra income when markets are winning, and to cut back a little (but not 50% please!), when markets are in temporary decline. It a healthy balance.

Comparing the ARF and the Annuity Scenarios

FeatureApproved Retirement Fund (ARF)AnnuityInitial Balance€1,000,000€1,000,000Income Impact (30% Market Decline)Reduced balance: €700,000; income may need adjustmentNo impact; fixed c€40,000 annual income (based on 4% annuity)FlexibilityHigh. Control over withdrawalsLow. Fixed income
(possibly increasing)VolatilityExposedNoneInheritance PotentialYes, subject to balanceLimited or none

Conclusion - What If Markets Fall by 30% in 2025

Market declines and ascents are a reality of investing, which we must welcome, expect and not fear. Our retirement planning must account for them. A 30% market drop in 2025 could impact some pension accumulators and spenders, depending on their portfolio and their needs.

At Informed Decisions, we think it is wise to look ahead at possible outcomes, and to ensure there is an element of flexibility and choice in whatever route one takes. Doing so can help you weather market storms, enjoy market growth, and achieve your retirement goals with peace!

Whether you lean towards an ARF, an annuity, or a combination of both, having a clear strategy and understanding the choices you will have in various scenarios is key to long-term financial security.

When we consider that a market like US (denoted as the S&P500) has delivered c10% per year average annual returns for decades, yet will have temporary declines of over 30% every c8 years (depending on whose data you look at), we serve ourselves well not forgetting that fact.

Look after your beans, and your beans will look after you!!

I hope this helps.

Thanks,

Paddy

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