Published at 4 December 2023

Plan members retiring into a downturn may have time to recover losses

Market volatility is unsettling for any investor, especially plan members who may be entering retirement as a potential market downturn looms. However, historical data shows that markets often rebound quicker than anticipated and that remaining invested may result in the greatest opportunity for long-term success.

Key takeaways:

    • Plan members invested in a diversified portfolio, such as a target-date fund, who retire into a market downturn may often have time to recover losses.
    • Investment time horizons are extending as members delay withdrawals.

Plan members nearing retirement are often faced with the challenge of wanting to protect the capital that they’ve accumulated while retaining some exposure to growth assets to ensure their savings continue to grow. Often, members retiring into a downturn may instinctively want to disinvest from the market, inadvertently realizing capital losses.

To better understand the potential experience of a plan member invested in a target-date fund during a market downturn, we conducted an analysis using data from the 2007–2009 global financial crisis, one of the most severe downturns in recent decades, which dragged global economies and most asset classes down simultaneously.

A member’s experience of retiring into a downturn

We present an example of a member retiring as the market starts to decline, using the following parameters:

    1. A member is invested in a target-date fund with a representative glide path, which is an asset-weighted average of glide paths from the target-date fund suites in the target-date Canadian Investment Funds Standards Committee categories.
    2. By January 2007, at age 64, the member has accumulated $1 million in retirement savings and continues to contribute $500 monthly until retirement.
    3. On retiring in December 2008 at age 65, the member doesn’t draw from the retirement account for five years, making a first withdrawal in December 2013, at age 70. This aligns with common tax strategies used for Canadian retirees aiming to minimize up-front tax and involves delaying withdrawals from taxable retirement accounts such as Registered Retirement Savings Plans (RRSPs) and Registered Retirement Income Funds (RRIFs) to the extent possible, as income from these accounts is subject to taxation. Members are required to convert an RRSP to an RRIF before the end of the year that they turn 71 years old. Mandatory minimum withdrawal rules take effect within one year of establishing an RRIF. Withdrawals from other capital accumulation plans, such as tax-free savings accounts, aren’t taxed, making them a more beneficial account to withdraw from than retirement accounts when a member is between the ages of 65 and 71 years.

Retiring into a downturn

$1 million invested in a diversified portfolio of asset classes January 2007–December 2013

The chart shows the performance of a sample diversified portfolio from January 2007 to December 2013, for a member who retired into the market downturn in December 2008. Despite initial losses, the portfolio shows 47% growth 5 years after retirement.

Source: Bloomberg, Morningstar, Manulife Investment Management, March 2023. For illustrative purposes only. Not reflective of any fund. The representative glide path is an asset-weighted average of glide paths from the target-date fund suites in the target-date CIFSC categories. Benchmarks were employed as a proxy for the asset classes, with Canadian equity represented by the S&P/TSX Composite Index, foreign equity proxied by the MSCI World Index, Canadian fixed income proxied by the FTSE Canada Universe Index, and U.S. fixed income proxied by the Bloomberg U.S. Aggregate Bond Index. It is important to note that this analysis is based on several key assumptions, including end-of-month contributions, monthly rebalancing, and no rebalancing fees. It is not possible to invest directly in an index. Past performance does not guarantee future results.


With $1 million in accumulated retirement savings and regular contributions of $500 per month until retirement, the member’s portfolio reaches a maximum value of $1.03 million prior to retirement in May 2008 before the market downturn begins. The portfolio reaches a postretirement low in February 2009, by which time it has lost 16.0% in value from its previous high. Retirement savings are now valued at $865,857. A loss of this magnitude would be alarming for any investor. To put things into perspective, the S&P 500 Index (CAD) experienced a decline of 33.4%, while the S&P/TSX Composite Index decreased by 40.1% over the same period.

Plan members in this situation may be tempted to sell holdings, possibly opting for placing capital in cash rather than sustain more losses. This could be a significant mistake as selling financial assets into a downturn crystallizes losses, severely limiting a portfolio’s ability to fully participate in a recovery. However, we recognize that behavioural biases driven by broad market sentiment at this point in a downturn are often so strong that their effects become pervasive, causing many investors to sell at the worst time.

Hindsight in these instances is a useful reminder that every downturn in history has been followed by a recovery, oftentimes sooner than markets anticipate. We believe this also underpins the merits of being invested in a strategic, well-diversified, and actively managed portfolio that follows a deliberate and robust glide path design.

Retirement trends indicate lengthening investment time horizons

Plan members who delay withdrawals during market downturns can potentially benefit from subsequent recoveries, leading to improved portfolio performance and greater financial stability. According to data from Statistics Canada, there’s been a notable shift in retirement patterns among Canadians, with an increasing number of individuals choosing to work longer. Over the past two decades, the average age of retirement has shown a steady increase from 61 years in 2000 to 65 years in 2022. One reason for this trend may be the removal of the mandatory retirement age in Canada in 2009, which gives workers greater flexibility in deciding when to retire. Additionally, incentives provided through government programs such as Old Age Security and the Canada Pension Plan/Quebec Pension Plan have encouraged individuals to delay retirement and continue working by providing additional benefits for those who work longer. These incentives include increased pension benefits and the ability to continue contributing to retirement savings accounts.

This trend has created a longer investment horizon for retirees, allowing them to potentially weather market downturns by delaying withdrawals from their portfolios and remaining invested, even during downturns. Moreover, remaining invested may counteract the effects of needing to fund a longer retirement: On average, life expectancy at age 65 has increased from 18 years in 2000 to 20 years in 2020, meaning that people are living longer. It’s important to note that this is just an average, implying that almost 50% of members will outlive that age. This emphasizes the need for retirees to plan for a longer retirement and highlights the importance of long-term planning when managing retirement savings.

Weathering volatility: taking the long-term view

Market downturns are stressful, especially for members entering retirement. But it shouldn’t derail a member’s retirement savings plan. Historically, downturns have rebounded quicker than anticipated, giving members an opportunity to recover losses while avoiding the common mistake of selling assets in a market downturn.

As life expectancies increase, members may be facing an equal—or more—number of years in retirement than they did working and saving. This has major consequences for retirement savings as members aim to achieve a modest standard of living throughout retirement. Therefore, it’s important for members to plan well and be thoughtful in adding performance whenever possible. By choosing a target-date fund for retirement savings, members are less likely to allow short-term negative sentiment to influence their behaviour and are potentially more likely to achieve better long-term financial outcomes as a result.

Find out more about saving for retirement using target-date funds. Read our white paper “Weathering market volatility with target-date funds.”

Important disclosures

The commentary in this publication is for general information only and should not be considered legal, financial, or tax advice to any party. Individuals should seek the advice of professionals to ensure that any action taken with respect to this information is appropriate to their specific situation.