Sequence of Returns Risk — Why Timing Matters More Than You Think
Average returns are not what matter most in retirement. The timing of those returns — especially in the early years — can make or break your plan.
One of the least understood risks in retirement planning is sequence of returns risk. The concept is simple: the timing of market returns matters, especially in the early years of retirement. Poor returns early — combined with ongoing withdrawals — can have a lasting impact that average returns alone don't capture.
The Idea
The timing of market returns matters — especially in the early years of retirement. Two retirees can have identical average returns over a 20-year retirement and end up with dramatically different outcomes based solely on when the good and bad years occurred.
If negative returns occur early in retirement — when you're making regular withdrawals — those withdrawals lock in losses and reduce the number of shares available to recover when markets rebound. The portfolio never fully catches up.
A Simple Example
Consider two retirees, each starting with $1,000,000 and withdrawing $50,000 per year:
Retiree A experiences a 30% loss in year one, followed by strong returns. After 20 years, the portfolio may be depleted.
Retiree B experiences the same returns in reverse order — strong years first, the 30% loss in year 19. After 20 years, the portfolio is still substantial.
Same average return. Same withdrawal amount. Dramatically different outcomes — because of when the loss occurred.
What to Do About It
Cash buffer strategy: Keep 1–2 years of living expenses in cash or short-term bonds. When markets decline, draw from the buffer rather than selling equities at a loss. This gives your portfolio time to recover.
Flexible spending: Have a plan for reducing discretionary spending during significant market downturns. Even a 10–15% reduction in withdrawals during a bad year can meaningfully extend portfolio longevity.
Diversified income sources: The more of your essential expenses covered by guaranteed income (Social Security, pension, annuity), the less you need to withdraw from your portfolio — reducing your exposure to sequence risk.