When the Market Falls, Roths Cushion — But Don’t Save the Day
Follow-up to How Roth Allocations Quietly Extend Retirement Life.
The earlier paper showed that adding Roth assets to retirement portfolios extends their life by roughly 1–1½ years under stable, inflation-matched returns. The mechanism was simple: Roth withdrawals lower taxable income and slow the tax creep that gradually erodes Social Security benefits. Over decades, that quiet efficiency buys meaningful longevity.
This short extension keeps every assumption identical—5 % inflation, indexed tax brackets, frozen Social Security thresholds, a $1 million starting balance, $25 000 annual benefit, and a 4 % initial withdrawal—but changes one thing: the market’s first act.
Instead of smooth growth, returns are –20 % in year 1, 0 % in year 2, then +7 % nominal thereafter.
Results
All portfolios fail far sooner than in the baseline (mid-30s years). Yet the ordering holds: Roth diversification still stretches life modestly.
A Roth reduces taxes; it doesn’t reverse capital loss, which are initially quite large in this scenario.
When a 20 % drop hits before the first withdrawal cycle, the portfolio base collapses immediately.
Tax savings of a few thousand dollars a year cannot offset the permanent loss of compounding on two hundred thousand dollars of vanished value.
Sequence risk is multiplicative and immediate; tax efficiency is incremental and slow.
Moreover, Social Security “tax creep”—the main driver of Roth benefits—unfolds over decades. In this stress test, portfolios are gone long before that slow advantage can fully develop.
The Roth is a shock absorber, not a parachute.
It smooths taxes and reduces required disbursements when markets stumble, but it cannot rebuild a shattered base.
Follow-up to How Roth Allocations Quietly Extend Retirement Life.
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