The ’10-5-3 Rule’ — How Savvy Retirees Shield Their Savings From Market Crashes

A market crash feels different after retirement because the money falling in value may also be paying next month’s bills. Selling investments after a large decline can turn what might have been a temporary loss into a permanent reduction in the assets available for recovery.

That is why the 10-5-3 rule deserves more explanation than its catchy name usually receives. It can help retirees think realistically about stocks, bonds and cash, but it does not provide a magic shield against falling markets.

The real protection comes from understanding what each part of a retirement portfolio is supposed to do, keeping near-term spending away from unnecessary market risk and remaining flexible when markets behave badly.

1. What the 10-5-3 Rule Actually Means

The first surprise is that the 10-5-3 rule is frequently misunderstood. It is generally described as a rough planning assumption that stocks might produce about 10% annually over long periods, bonds about 5%, and cash or savings about 3%.

Those are not guaranteed returns, and they are not instructions to hold 10% stocks, 5% bonds and 3% cash. Actual returns can be dramatically higher or lower over individual years, and inflation reduces what nominal returns can buy.

The useful retirement lesson is simpler. Stocks, bonds and cash serve different purposes, and expecting every dollar to provide high growth, complete stability and instant liquidity at the same time is unrealistic.

Several other numbers also matter to American retirees in 2026. They can influence how much money must come from investments when markets weaken.

The Social Security Administration confirms a 2.8% COLA for 2026, while the IRS says traditional IRA and many retirement-plan owners generally begin RMDs at age 73 under current rules. Individual circumstances and account types can change how those rules apply.

2. Why a Market Crash Is Different After the Paycheck Stops

Suppose a worker has $900,000 invested and the market falls sharply. The decline is unpleasant, but that worker may continue contributing through a 401(k), receiving a salary and buying additional shares while prices are lower.

Now consider a recently retired household with the same $900,000 but needing $35,000 or $40,000 from its investments this year. That household may have to sell investments precisely when prices are depressed.

Once shares are sold to pay expenses, those shares cannot participate in a later recovery. That is one reason a retirement portfolio faces a risk that an accumulation portfolio does not face in quite the same way.

Fidelity calls this sequence-of-returns risk. The order in which strong and weak returns occur can have a major effect when withdrawals are leaving the portfolio at the same time.

3. The Real Enemy Is Sequence Risk

Fidelity illustrates the problem with two hypothetical retirees starting with $1 million and taking $50,000 annual withdrawals. Both scenarios experience the same returns, but in reverse order.

The hypothetical retiree hit by poor returns early eventually runs out of portfolio money in year 27. The retiree receiving positive returns first still has more than $3 million after 30 years in Fidelity’s illustration, despite experiencing the same set of returns overall.

This does not predict what any real retiree will experience. Fidelity’s example uses hypothetical returns and assumptions, but it illustrates why average return alone cannot tell someone whether a retirement plan is durable.

Two retirees can earn similar average returns and still experience very different outcomes. Timing matters once money is continuously leaving the account.

4. Give Different Dollars Different Jobs

This is where the spirit of the 10-5-3 rule becomes more useful than the literal numbers. A retiree does not need every dollar available tomorrow, but neither should money needed for next month’s mortgage or grocery bill depend entirely on what the stock market does next week.

One way to think about retirement savings is in layers. Near-term spending requires liquidity, intermediate money can seek somewhat more income and stability, and money unlikely to be needed for many years can retain greater growth exposure.

Schwab, for example, suggests having about one year’s worth of portfolio-funded spending needs in cash, after accounting for regular income such as Social Security or pensions. It also discusses holding another two to four years of living expenses in relatively liquid investments such as short-term bonds or CDs.

That is not a universal prescription. Someone whose pension and Social Security cover nearly every essential expense may require less portfolio liquidity than someone funding most of retirement directly from an IRA.

5. How Much Cash Should a Retiree Keep?

The right question is not, “How much of my net worth should be cash?” It is, “How many dollars might I reasonably need from the portfolio before I would want to sell stocks?”

Consider a hypothetical retired couple spending $78,000 annually. Suppose Social Security and a small pension provide $55,000, leaving only $23,000 that must normally come from investments.

One year’s portfolio-spending reserve for that household is closer to $23,000 than $78,000. Two years would be about $46,000, although taxes, emergencies and irregular expenses could justify additional liquidity.

This distinction prevents retirees from holding excessive cash simply because their household spending looks large. Dependable outside income reduces the portion of expenses the portfolio must produce.

Cash creates breathing room, but there is a tradeoff. Too little liquidity can force selling after a market decline, while too much can leave a large portion of a long retirement exposed to inflation and lower long-term growth.

6. Bonds Can Buy Time, but They Are Not Risk-Free

Bonds often occupy the middle ground between cash and stocks. High-quality short-term and intermediate bonds may provide income and historically tend to fluctuate less than stocks, which can make them useful sources of retirement spending during equity declines.

They are not guaranteed to rise whenever stocks fall, however. Interest-rate changes, credit risk and inflation can cause bond values to decline, and the experience of 2022 reminded investors that stocks and bonds can fall together.

That is why simply owning “some bonds” is not enough. Bond quality, maturity, duration and the purpose of the holding all matter.

A retiree using bonds as money that may be needed within a few years generally has a different objective from someone seeking maximum long-term return. The point is to create options, not to predict which asset class will win next year.

7. Why Going Completely to Cash Can Create Another Problem

Watching an account fall 20% or 30% can make an all-cash retirement portfolio sound comforting. The problem is that retirement may last 20, 25 or 30 years, sometimes longer.

A portfolio designed only to avoid short-term losses may struggle to maintain purchasing power over such a long period. Food, insurance, home repairs, property taxes, transportation and healthcare do not stop rising simply because a retiree stops working.

Vanguard emphasizes balancing market volatility with longer-term risks such as inflation and longevity. Its retirement guidance supports diversification and an asset mix aligned with the retiree’s goals, time horizon and capacity for market fluctuations rather than abandoning growth assets altogether.

This is the important tradeoff behind the 10-5-3 concept. Stocks may create uncomfortable volatility, but cash creates its own risk when held for decades.

8. Your Withdrawal Rate Matters as Much as Your Investments

A retiree taking 2% of a diversified portfolio has a very different problem from one withdrawing 8% while expecting the account never to shrink. Asset allocation cannot repair a spending plan that continually demands more than the portfolio can reasonably support.

Fidelity generally discusses starting retirement withdrawals in a range of about 4% to 5%, followed by inflation adjustments, while stressing that longevity, market conditions and personal circumstances can change the sustainable amount.

Morningstar’s retirement-income research has produced more conservative results under particular assumptions. Its 2024 research, published for retirees planning in 2025, estimated a 3.7% starting rate for a 30-year retirement with fixed inflation-adjusted withdrawals and a 90% modeled success rate.

Morningstar specifically cautions readers against treating that figure as a universal annual commandment.

The lesson is not that 3.7%, 4% or 5% is automatically correct. It is that the withdrawal amount, retirement length, asset allocation, taxes and willingness to adjust spending must be evaluated together.

9. Cutting Spending Temporarily Can Be Surprisingly Powerful

Retirees sometimes hear “spending flexibility” and picture giving up everything enjoyable about retirement. That is not necessarily what dynamic spending means.

A household might keep housing, food, insurance and healthcare spending intact while postponing a major vacation, delaying a vehicle replacement or reducing gifts for one year after a severe market decline. These temporary decisions can reduce the number of investments that must be sold at depressed prices.

Vanguard’s dynamic-spending approach allows withdrawals to move within predetermined floors and ceilings rather than automatically increasing spending every year regardless of portfolio performance. Vanguard says this flexibility can help preserve retirement assets during difficult markets while allowing somewhat higher spending when conditions improve.

Different choices create different tradeoffs during a crash.

The best response depends on the household. What matters is having these choices before fear forces a decision.

10. Social Security Can Act as Part of the Defensive Layer

Social Security is not an investment account, but its monthly benefit can reduce the amount a retiree must withdraw from investments during difficult markets. In 2026, Social Security benefits received a 2.8% COLA, according to the Social Security Administration.

Consider two retirees who each spend $60,000 annually. One receives $40,000 from Social Security and a pension and therefore needs $20,000 from investments, while another receives only $20,000 in dependable income and needs $40,000 from the portfolio.

Even with identical investment balances, their exposure to a market downturn is not identical. The second retiree is more dependent on selling portfolio assets to maintain the same level of spending.

This is one reason Social Security claiming should not be evaluated only by asking which age produces the largest monthly check. Health, longevity expectations, marital circumstances, survivor needs, employment, taxes and the availability of other assets all affect the decision.

11. RMDs Can Complicate a Down Market

Retirees subject to required minimum distributions cannot always respond to a bear market by simply deciding to withdraw nothing from a traditional IRA.

Under current IRS rules, traditional IRA owners and many retirement-plan participants generally must begin annual RMDs at age 73, although workplace-plan rules and individual circumstances can differ.

An RMD is calculated using the previous December 31 account balance and an IRS life-expectancy factor. The distribution is generally included in taxable income except for portions that qualify for different tax treatment.

That creates a frustrating possibility. A retiree’s RMD may have been calculated from a higher year-end account value even though the market later falls before the money is withdrawn.

Fidelity’s 2026 guidance discusses options such as considering which holdings are sold to satisfy RMDs and, when cash is not actually needed for spending, potentially reinvesting after the required distribution has occurred. Tax treatment and account rules need to be considered carefully.

12. Avoid the Most Expensive Emotional Mistake

The temptation during a crash is to stop the pain. A retiree sees five or six years of withdrawals disappear from the account balance on paper and thinks, “I cannot afford another day like this.”

Selling everything may create emotional relief, but it also creates a new decision: when to get back in. A person who waits until markets “feel safe” again may not reinvest until much of the recovery has already occurred.

Fidelity warns that emotional reactions to short-term market events can interfere with long-term investment discipline. Vanguard likewise emphasizes diversification, flexibility and planning rather than attempting to eliminate uncertainty.

Doing nothing blindly is not the answer either. A portfolio that was too aggressive before a crash does not become appropriately diversified simply because selling now feels uncomfortable.

The better approach is to decide how much volatility the retirement plan can actually tolerate before the next downturn arrives. That allows changes in allocation to be made because the plan requires them, not because headlines became frightening.

13. A Practical Crash Plan Before the Next Crash Arrives

A market-crash plan works best when written during a calm market. Waiting until investments have already fallen sharply makes every decision compete with fear, regret and the natural urge to protect what remains.

Start with the household’s spending gap. Subtract reliable income such as Social Security and pensions from expected annual spending, then identify how much normally needs to come from investments.

Next, separate essential expenses from expenses that could be delayed temporarily. A household that can cut portfolio withdrawals by $10,000 for a year has more room to respond than one whose entire budget is fixed.

Finally, decide which account and which asset will normally fund withdrawals. Taxable brokerage accounts, traditional IRAs, Roth accounts and workplace plans can have different tax consequences, so withdrawal sequencing deserves more attention than simply selling whatever happens to be easiest.

The strongest retirement plans usually do not depend on predicting the next recession or bear market. They are designed so that an incorrect market forecast does not immediately destroy the household budget.

That is a much more useful form of protection than any catchy investing rule.