Sequence of returns risk happens when the market drops early in retirement, and you’re forced to sell while prices are down.
It can shrink your savings faster than expected.
Even if investment returns improve later, the damage may already be done.
You don’t need to time the market. But you do need a plan that protects your income from poor timing.
This article explains what sequence risk is, why it matters, and how to manage it.
What is Sequence of Returns Risk?
Sequence of returns risk is the danger that the order of your investment returns (not the average return) can hurt your retirement.
The market might drop early in retirement when you’re taking money out. That’s a problem.
You may need to sell investments while they’re down, which locks in the loss. Your balance will likely suffer, even if the market bounces back.
That’s because there are fewer assets left to grow.
This is different from when you’re still working and saving. During your working years, market ups and downs average out over time. But once you retire, the sequence of those ups and downs can have a big effect.
Sequence risk is especially dangerous in the early years of retirement. That’s when a few bad years in the market, combined with regular withdrawals, can do the most damage to your long-term financial security.
In short, two retirees with the same average annual return can end up with very different outcomes depending on when those investment returns happen.
It’s a silent threat you can prepare to face.
Why Sequence Risk Matters in Retirement
Sequence risk matters most once you stop working. You’re no longer adding money to your savings. You’re taking money out instead.
That changes the math. Market drops aren’t just paper losses anymore. You may need to liquidate investments to create income!
This makes the retirement red zone important; the five years before and after you retire.
What happens during this window can have a significant impact on your long-term financial security.
It’s about protecting your retirement nest egg and building a steady retirement income.
Example: Same Returns, Different Outcomes
Let’s look at two retirees: Investor A and Investor B. They both retire with $1 million. They both withdraw $50,000 per year. And over a 20-year period, they experience the same investment returns on average.
But here’s the twist: the order of those returns is different.
Investor A sees a few bad years right at the start. Investor B sees those bad years at the end. The average return is the same for both. But the outcome couldn’t be more different.
Investor B ends the 20 year period with $336,846 more than Investor A!
Why?
Because Investor A had to sell investments during market downturns to generate income. Those early losses made it almost impossible for the investment portfolio to recover, even when returns improved later on.
Investor B, on the other hand, had positive returns earlier.
Here’s a simple side-by-side to show how the same returns in a different order can lead to very different results:
| Investor A | Investor B | |||
| Year | Return | Balance | Return | Balance |
| 1 | -15% | $807,500 | -8% | $874,000 |
| 2 | -8% | $696,900 | -5% | $782,800 |
| 3 | -5% | $614,555 | 2% | $747,456 |
| 4 | 2% | $575,846 | 4% | $725,354 |
| 5 | 4% | $546,880 | 6% | $715,875 |
| 6 | 6% | $526,693 | 8% | $719,146 |
| 7 | 8% | $514,828 | 10% | $736,060 |
| 8 | 10% | $511,311 | 12% | $768,387 |
| 9 | 12% | $516,668 | 15% | $826,145 |
| 10 | 15% | $536,669 | 18% | $915,852 |
| 11 | 18% | $574,269 | 15% | $995,729 |
| 12 | 15% | $602,909 | 12% | $1,059,217 |
| 13 | 12% | $619,258 | 10% | $1,110,138 |
| 14 | 10% | $626,184 | 8% | $1,144,950 |
| 15 | 8% | $622,279 | 6% | $1,160,647 |
| 16 | 6% | $606,616 | 4% | $1,155,072 |
| 17 | 4% | $578,880 | 2% | $1,127,174 |
| 18 | 2% | $539,458 | -5% | $1,023,315 |
| 19 | -5% | $464,985 | -8% | $895,450 |
| 20 | -8% | $381,786 | -15% | $718,632 |
Note: Each year’s starting balance is reduced by a $50,000 withdrawal before returns are applied. For simplicity, we assume withdrawals are made at the beginning of each year and returns are applied afterward.
This shows how early losses can hurt your plan. That’s sequence of returns risk in action.
Real-World Historical Context
The early 2000s were a rough time to retire. The stock market experienced three straight years of negative returns from 2000 to 2002. Then it crashed again in 2008.
If you retired then, your savings probably shrank fast.
That’s how sequence of returns risk shows up in real life.
Now think about someone who retired in 2003 or 2009. They started after the crash. Stocks were cheaper. The market had room to grow.
Strong early returns gave their savings a better chance to last.
Vanguard has studied this extensively. Their research shows that market volatility early in retirement raises the risk of running out of money.
Good long-term returns may not help if you start in a hole.
Timing matters. Retiring into a downturn can shake the foundation of your plan from day one.
Common Triggers and Risk Factors
Here are common risk factors that raise sequence risk:
- Retiring into a bear market: Starting retirement during a downturn forces you to liquidate investments at a loss, locking in damage early.
- High stock exposure or interest rate risk: Portfolios heavy in stocks or vulnerable to rising rates can drop sharply, especially when combined with annual withdrawals.
- Fixed withdrawal strategies: Withdrawing the same amount each year, no matter what the market does, can drain your savings faster in down years.
- Inflation: Higher living costs mean you may need to withdraw more, just as your investment portfolio is struggling to keep up.
Each of these can magnify the damage of early losses and reduce the lifespan of your retirement savings.
How to Manage and Mitigate Sequence Risk
You can’t control the market. But you can control your strategy.
That’s the key to protecting yourself from sequence risk in retirement. You can’t control when the market goes up or down. But you can control how you respond. With the right strategy, you can manage volatility and reduce the risk of bad timing hurting your plan.
Here are five strategies that can help:
Use a Bucket Strategy to Protect Retirement Income
A bucket strategy divides your savings into different segments, each with a specific purpose and time horizon.
- Short-term bucket: Holds cash or cash equivalents to cover 1–2 years of living expenses.
- Mid-term bucket: Holds bonds or conservative investments to refill the short-term bucket as needed.
- Long-term bucket: Holds stocks and growth investments for future needs, typically 5+ years out.
You can pull income from safer assets when the market drops. That means you don’t have to sell stocks at a loss. It gives your investments time to recover.
Maintain a Cash Reserve for Market Volatility
A cash cushion can soften a slump.
Keeping 1–2 years of expenses in cash or highly liquid accounts gives you flexibility when the market takes a hit.
If your diversified portfolio drops in a down market, you can tap into your reserve instead of withdrawing from long-term investments. This gives your investments time to rebound.
Preserve Retirement Savings with Dynamic Withdrawal Strategies
Fixed withdrawal rules can be risky. Taking out the same amount each year, no matter what, can hurt your plan in a down market.
A better way is to stay flexible. That’s where dynamic withdrawals come in. You adjust what you take based on a few things:
- How the market is doing
- How much is left in your portfolio
- Changes in the cost of living
It’s really about making your money last and helping you manage sequence risk over time.
Consider Income-Producing Products and Strategies
Certain products and strategies can help create predictable income, reducing the pressure on your portfolio. Examples include:
- Bond ladders
- Dividend-paying investments
- Immediate or deferred income annuities (if appropriate)
- Rental income from real estate
These options add steady retirement income. They aren’t for everyone, so make sure they fit your plan!
Delay Social Security to Strengthen Your Income Floor
Delaying Social Security benefits can help. Each year you wait past full retirement age, your benefit goes up. The increase is about 6-8% per year until age 70.
That higher monthly check is guaranteed. It doesn’t depend on the stock market. It can cover part of your basic needs and reduce how much you take from investments early on.
This gives your portfolio more time to recover after a drop. It’s worth considering.
The goal is simple. Build a plan that can hold up when the market doesn’t.
When to Start Planning for Sequence Risk
The best time to plan for sequence of returns risk is before you retire. Not after the market has already dropped.
Planning ahead gives you more options. You can:
- Adjust your investment mix to reduce exposure to early losses
- Build a cash reserve while you’re still earning income
- Delay major spending or shift your retirement timeline if needed
- Design a flexible withdrawal strategy that adapts to market conditions
It may be too late if you wait!
That’s why we encourage clients to build a strategy for sequence risk before they need it. Start early. That gives you more control.
How Sequence Risk Affects Your Retirement Plan (and How Financial Professionals Can Help)
Sequence risk is both a market problem and a planning problem.
It has a significant impact on how much income you can safely draw, how long your savings might last, your risk tolerance, and how much market risk your plan can handle.
Financial advisors can help. They use financial planning tools like cash flow modeling and Monte Carlo simulations. These tools test your plan in good markets and bad ones.
An advisor can also help you build a smart withdrawal plan. They can adjust your investment strategy. They can add buffers like cash reserves or income-producing assets to help manage sequence risk.
By addressing sequence risk early, you can approach retirement with more clarity, more confidence, and more control.
Final Thoughts: Don’t Leave It to Chance
You can’t control what the market does next. But you can control how you prepare for it.
Sequence of returns risk doesn’t need a crash to cause damage.
The good news is, with the right strategy, you can reduce that risk and create more stable, reliable income throughout retirement.
If you’re nearing retirement or already drawing income, please schedule a meeting to discuss how to protect your plan from sequence risk. A little retirement income planning today can make a big difference in the years ahead.