If you’re within a few years of retiring (or you’ve just retired), you’ve probably spent a lot of time thinking about savings rates, investment returns, and whether you’re “on track.” But there’s a sneaky risk that doesn’t get nearly as much attention as it deserves: sequence of returns risk.
It’s not about whether markets go up or down in the long run. It’s about when they go up or down—especially during the window when you stop earning a paycheck and start pulling money from your portfolio. That timing can change the outcome dramatically, even if your average return over time looks perfectly fine on paper.
In this article, we’ll break down what sequence of returns risk is, why it hits hardest right before and right after retirement, and the practical steps you can take to reduce the damage it can cause. We’ll keep it friendly, real-world, and focused on decisions you can actually make.
The “same average return” trap
One of the most confusing things about sequence of returns risk is that it can happen even if your portfolio earns a strong long-term average return. Two retirees can invest in the same types of assets, earn the same average annual return over 20–30 years, and still end up with very different results.
The key difference is the order of returns. If the market drops early in retirement, you may be forced to sell more shares at lower prices to fund spending. Those sold shares are no longer there to recover when markets rebound later. That’s the “sequence” problem in plain language.
When you’re still working and contributing to your accounts, a market downturn can actually help you (you’re buying at lower prices). But once you’re withdrawing, downturns can hurt more than you expect because withdrawals lock in losses.
Sequence of returns risk, explained without the math headache
Let’s imagine two people retire with $1,000,000 and withdraw $40,000 a year (adjusted for inflation). Both experience an average return of, say, 6% over the next decade. Sounds identical, right?
Not necessarily. If Person A gets positive returns in the first few years and negative returns later, their portfolio may stay healthier because early gains create a bigger cushion. Person B might get negative returns early—maybe a bear market hits right after they retire—and even if markets recover later, the portfolio may never fully catch up because withdrawals happened during the dip.
This is why sequence of returns risk is often called a “retirement timing” risk. It’s less about what you earn over decades and more about what happens during a short, critical period when you’re most vulnerable.
Why the years right before retirement are a danger zone
People often assume sequence of returns risk starts on the day they retire. In reality, the risk window can begin several years earlier—especially if you’re shifting your mindset from accumulation (saving) to distribution (spending).
During the final stretch of your career, your portfolio is often at its largest it’s ever been. A 20% decline at age 35 feels different than a 20% decline at age 64, because the dollar amount is bigger and you have less time and fewer new contributions to recover.
Also, many pre-retirees start making irreversible decisions in these years: when to claim Social Security, whether to pay off a mortgage, whether to downsize, how much cash to keep, or whether to retire fully or phase out. These choices can either cushion or amplify the impact of a poor return sequence.
The hidden connection between withdrawals and market drops
Withdrawals are what turn normal market volatility into a bigger structural problem. When markets are down, your portfolio value is lower. If you withdraw the same dollar amount anyway (because you need to pay bills), you’re selling a larger percentage of the portfolio.
That creates a double hit: your investments are down, and you’re removing more shares while they’re down. Even if markets bounce back later, the recovery happens on a smaller base because you already sold part of it.
This is why retirement planning isn’t just about picking investments—it’s about building a withdrawal strategy that can flex when markets get rough.
A quick story: the “retire into a recession” scenario
Picture someone who retires in early 2008, right before the financial crisis, or in early 2020, right before the COVID crash. Those are extreme examples, but they illustrate the point clearly.
If you retire into a major downturn, you may be withdrawing from a portfolio that’s shrinking rapidly. Even if the market recovers in a year or two, your portfolio might not bounce back to where it would have been if you hadn’t been taking withdrawals during the decline.
Now, most retirees won’t face a once-in-a-generation crash on day one. But smaller bear markets and multi-year flat periods happen regularly. Sequence risk is essentially the risk of bad luck in timing—and it’s common enough that it deserves a real plan.
How sequence risk shows up in real retirement decisions
Sequence of returns risk isn’t just an investing concept. It affects everyday choices: how much you can spend, when you can travel, whether you can help family, and how comfortable you feel about big one-time expenses.
It also influences how you think about “safe” withdrawal rates. You’ve probably heard rules of thumb like the 4% rule. Those can be useful starting points, but they don’t account for how flexible your spending is, what your tax situation looks like, or whether you have guaranteed income sources like pensions or annuities.
In other words, sequence risk is personal. It depends on your spending needs, your flexibility, your income sources, and your overall plan—not just your investment returns.
The retirement paycheck problem: replacing income is harder than it sounds
During your working years, your paycheck is the stabilizer. If the market drops, you don’t have to sell investments to pay for groceries. You keep contributing, you keep earning, and time does the heavy lifting.
Right before retirement, that stabilizer is about to disappear. That’s why building a “retirement paycheck” matters so much. Some people do it with a mix of Social Security, pensions, part-time work, and systematic withdrawals. Others incorporate annuities or bond ladders. There’s no single best approach, but the goal is the same: reduce the need to sell risky assets at the worst possible time.
If you’re exploring different retirement options for individuals, it can help to view each option through the lens of sequence risk: Does this choice add stability to cash flow, or does it increase the chance I’ll be forced to sell investments during a downturn?
Three common misconceptions that make sequence risk worse
“I’m diversified, so I’m safe”
Diversification is important. A mix of stocks, bonds, and cash can reduce volatility. But it doesn’t erase sequence risk, because the risk is driven by withdrawals during down markets, not just by having a bumpy ride.
In some environments, bonds can fall at the same time as stocks (we’ve seen periods where rising interest rates hurt bond prices). Diversification helps, but you still need a plan for what you’ll sell and when.
A better mindset is: diversification is the foundation, but withdrawal strategy is the safety system.
“If my average return is good, I’m fine”
Average returns can hide a lot. A portfolio that swings wildly can have the same average as a smoother portfolio, but the retiree living off it will experience those swings differently than someone still saving.
When you’re withdrawing, volatility becomes more than an emotional issue—it becomes a math issue. The order of returns can shrink the portfolio’s ability to recover.
That’s why retirement projections should include stress tests and scenarios, not just a single “expected return.”
“I’ll just cut spending if the market drops”
Flexibility is powerful, and cutting spending can absolutely help. But it’s also easier said than done. Some expenses are fixed: housing, utilities, insurance, healthcare, and basic living costs.
And even discretionary spending can be emotionally tied to your retirement goals: travel, hobbies, time with family, helping grandkids, or finally doing the things you postponed while working.
The most realistic approach is to plan for tiered flexibility: know what you can reduce quickly, what you can postpone, and what you truly can’t change.
Practical ways to reduce sequence of returns risk
There’s no magic switch that eliminates sequence risk, but there are several strategies that can make it far less damaging. Most retirees use a combination rather than relying on just one lever.
Think of it like building a house for unpredictable weather. You want more than one layer of protection: solid foundation, good drainage, strong roof, and a backup generator.
Build a cash buffer (but don’t overdo it)
Holding cash for near-term spending can reduce the need to sell investments during a downturn. Many retirees keep one to three years of essential expenses in cash or cash-like instruments, depending on their comfort level and income sources.
The benefit is straightforward: if markets fall, you can spend from cash while giving your investments time to recover. That can reduce the “sell low” problem.
The tradeoff is that too much cash can drag long-term growth, especially over a 20–30 year retirement. The goal isn’t to hide from the market forever—it’s to create enough breathing room to avoid forced selling.
Use a “bucket” approach for spending and investing
The bucket strategy is popular because it matches how people naturally think. You separate money into buckets based on time horizon: short-term spending, mid-term stability, and long-term growth.
In practice, the short-term bucket might be cash for bills, the mid-term bucket might be high-quality bonds or conservative funds, and the long-term bucket might be stocks for growth. During a downturn, you draw from the safer buckets and let the growth bucket recover.
What makes this work is not the labels—it’s the discipline of rebalancing and refilling buckets during good markets so the short-term bucket is ready when you need it.
Adjust withdrawals with guardrails
Instead of withdrawing a fixed amount every year no matter what, many retirees use guardrails: rules that allow spending to rise when markets do well and tighten when markets struggle.
For example, you might set a target withdrawal rate but reduce withdrawals if your portfolio drops below a certain threshold. Or you might skip inflation increases in down years. Small adjustments early can prevent bigger sacrifices later.
This approach can feel more empowering than a strict “never touch principal” mindset, because it gives you a plan for both good times and bad times.
Consider partial retirement or part-time income
Even a modest amount of earned income in the first few years of retirement can dramatically reduce sequence risk. It lowers the amount you need to withdraw from your portfolio, especially during the vulnerable early years.
Part-time work doesn’t have to mean stress or a full schedule. Some retirees do consulting, seasonal work, or a flexible role tied to a hobby or interest. The goal isn’t to grind—it’s to create an income bridge.
And there’s a psychological benefit too: knowing you have another income stream can make it easier to stay calm and avoid panic selling during market drops.
How Social Security timing can help (or hurt)
Social Security is one of the most valuable “anti-sequence-risk” tools available because it’s a form of inflation-adjusted income that doesn’t depend on market performance. The timing decision—claiming early vs. waiting—can change how much guaranteed income you’ll have for life.
Delaying benefits increases your monthly payment, which can reduce how much you need to withdraw from your portfolio later. That can be especially helpful if you live a long time or if markets are choppy in your later retirement years.
But delaying isn’t always the best move. Health, family longevity, spousal benefits, taxes, and cash flow needs all matter. The important part is to treat Social Security as a strategic lever, not just a checkbox you handle when you turn a certain age.
Healthcare costs: the wildcard that can force bad timing
Healthcare is one of the biggest reasons retirees withdraw more than planned. A surprise expense—or even just higher-than-expected premiums—can push you to take extra money from your portfolio at the wrong time.
This is where planning gets very real. It’s not just about covering routine costs; it’s also about understanding the structure of Medicare, supplemental coverage, prescription plans, and how all of it changes as you age.
Working with medicare advisors St. Louis (or qualified advisors in your area) can help you avoid costly missteps that create unnecessary withdrawals. The less you’re forced into “emergency selling,” the more control you keep over your sequence risk.
Taxes can amplify sequence risk more than people expect
Sequence risk isn’t only about market returns—it’s also about what you keep after taxes. If your withdrawal strategy triggers higher tax brackets, IRMAA surcharges for Medicare, or higher taxation of Social Security benefits, your net spending power can drop.
That can lead to a frustrating cycle: you withdraw more to cover the tax bill, which increases taxable income, which may increase taxes again. In down markets, this can be especially painful because you’re selling assets when they’re already depressed.
Tax-smart withdrawal sequencing—deciding when to pull from taxable accounts, tax-deferred accounts, and Roth accounts—can help smooth out income and reduce the odds of big tax spikes at the worst time.
Asset allocation: less about age, more about purpose
Many people have heard rules like “subtract your age from 100 to get your stock percentage.” Those rules are simple, but retirement isn’t simple. Your ideal mix depends on how much guaranteed income you have, how flexible your spending is, and what you’re trying to protect.
If most of your essential expenses are covered by Social Security and a pension, you may be able to take more investment risk because your lifestyle isn’t fully dependent on portfolio withdrawals. If your portfolio is doing the heavy lifting, you may need a more defensive structure.
The key is aligning your allocation with the job your money has to do in the next 1–5 years versus the next 10–30 years. Sequence risk lives in that near-term window, so your allocation should respect it.
Rebalancing in retirement: the underrated discipline
Rebalancing is one of those ideas everyone agrees with in theory, but it’s hard to do in practice—especially when headlines are scary. Yet a consistent rebalancing process can reduce sequence risk by forcing you to sell a little of what’s up and buy what’s down.
In retirement, rebalancing also ties directly to withdrawals. If stocks have had a strong run, you might fund withdrawals by trimming stocks (locking in gains). If stocks are down, you might fund withdrawals from bonds or cash instead, giving stocks time to recover.
That’s not market timing. It’s a rules-based approach to avoid selling the most depressed assets when you need cash.
When annuities and pensions fit into the sequence risk conversation
Guaranteed income products can reduce sequence risk because they shift part of your retirement paycheck away from market performance. If a portion of your essential spending is covered by guaranteed income, you may not need to withdraw as much from investments during a downturn.
That said, annuities aren’t one-size-fits-all. Fees, surrender periods, inflation protection (or lack of it), and the financial strength of the insurer all matter. Some people love the stability; others prefer flexibility and liquidity.
A practical way to think about it is to match guaranteed income to essential expenses, and keep investments for discretionary spending and long-term growth. That division can make sequence risk more manageable.
Behavior matters: panic selling is sequence risk’s best friend
Even the best plan can be derailed by emotional decisions. When markets drop, retirees often feel a unique kind of pressure: “I can’t afford to lose this money now.” That fear can lead to selling at the bottom and missing the recovery.
Sequence of returns risk is partly a math problem, but it’s also a behavior problem. A solid plan creates confidence, and confidence makes it easier to stick with the plan when markets are ugly.
One of the most useful exercises is to define, in writing, what you will do in a downturn: where withdrawals come from, how spending changes (if at all), and when you will rebalance. The goal is to reduce “in-the-moment” decisions.
Planning for the first 5 years: the retirement “launch phase”
The first five years before and after retirement are sometimes called the “retirement red zone.” It’s the period where sequence risk is most powerful because withdrawals are starting (or about to start) and the portfolio may be at peak size.
In this launch phase, it helps to get very specific. What will your monthly cash flow look like? Which accounts will you draw from? What happens if the market drops 20% in year one? What if inflation spikes? What if healthcare costs rise faster than expected?
These aren’t pessimistic questions—they’re practical ones. Stress-testing your plan makes it more resilient and helps you avoid overreacting when something predictable (like volatility) shows up.
How to think about spending: essential, lifestyle, legacy
One of the simplest ways to reduce sequence risk is to categorize spending into three groups: essential needs, lifestyle wants, and legacy goals (like leaving money to family or charity).
Essential spending should be the most protected. Many retirees aim to cover essentials with stable income sources (Social Security, pensions, annuities, or reliable withdrawals from conservative assets). Lifestyle spending can be more flexible and may come from growth assets.
Legacy goals are meaningful, but they should be planned in a way that doesn’t accidentally force you to underspend or overspend. A clear spending framework helps you make tradeoffs calmly, rather than reacting to market swings.
Account types matter: taxable vs. IRA vs. Roth
Where your money is held can affect how sequence risk plays out. Taxable accounts may offer more flexibility and potentially favorable capital gains treatment. Traditional IRAs and 401(k)s come with required minimum distributions (RMDs) later, which can force withdrawals regardless of market conditions. Roth accounts offer tax-free withdrawals and can be powerful for flexibility.
In a down market, being forced to take large taxable distributions can feel like adding insult to injury. Planning ahead—sometimes years ahead—can reduce the chance that RMDs or tax brackets push you into selling at the wrong time.
This is also why Roth conversions are often discussed in the years between retirement and the start of RMDs. They’re not for everyone, but they can be part of a strategy to create more control later.
What a good retirement plan includes (beyond a spreadsheet)
A retirement plan that truly addresses sequence risk is more than a projection with an average return assumption. It’s a living strategy that connects your investments, withdrawals, taxes, healthcare, and lifestyle priorities.
It should include scenario testing (not just one forecast), a clear withdrawal order, and rules for what happens in down markets. It should also define what “enough” looks like for you, so you’re not constantly guessing whether you can spend money.
If you’re looking for personalized retirement help, consider asking specifically how the plan addresses sequence of returns risk. The answer should be concrete: where income comes from, what gets sold first, what triggers spending adjustments, and how taxes and healthcare are integrated.
A simple checklist to pressure-test your own plan
Know your baseline monthly needs
Start with the basics: housing, utilities, food, insurance, healthcare, transportation, and any debt payments. This is the spending you need regardless of market conditions.
Then layer in discretionary spending: travel, hobbies, gifts, dining out, and fun. Separating these categories helps you see how flexible you really are.
Sequence risk is most dangerous when essential spending depends heavily on selling volatile investments. If that’s your situation, it’s worth strengthening the plan.
Map income sources to expenses
List reliable income sources: Social Security, pension income, annuity income, rental income, part-time work. Then compare that to essential spending.
If reliable income covers most essentials, you have more room to let your investments ride through volatility. If it doesn’t, consider strategies like delaying retirement, delaying Social Security, reducing fixed expenses, or building a larger cash buffer.
This mapping exercise often reveals that the real risk isn’t market performance—it’s cash flow fragility.
Define your “down market” rules ahead of time
Decide what you’ll do if the market drops 15–25%. Will you pause inflation increases? Reduce discretionary spending by a set percentage? Draw from cash for a year? Rebalance at preset thresholds?
Rules reduce stress. Stress leads to reactive decisions. Reactive decisions are where sequence risk can do lasting damage.
Even a simple written plan can make a big difference when emotions run high.
Sequence risk doesn’t mean you should avoid stocks
It’s tempting to hear all this and think, “So I should just go super conservative right before retirement.” But moving too conservatively can create a different problem: not enough growth to keep up with inflation over a long retirement.
For many retirees, the bigger risk isn’t a single bad year—it’s 25 years of rising costs. Stocks (or other growth assets) can help maintain purchasing power, especially when retirement could last decades.
The goal is balance: enough stability to fund near-term spending without forced selling, and enough growth to support the long game.
Putting it all together in a way that feels doable
Sequence of returns risk sounds technical, but the practical takeaway is simple: the first years around retirement are uniquely important, and your plan should be designed to handle bad timing without blowing up your lifestyle.
You don’t need to predict the next bear market. You just need a structure that assumes volatility will happen and gives you options when it does. That means a thoughtful mix of cash reserves, a withdrawal strategy with flexibility, tax awareness, and healthcare planning.
If you’re nearing retirement, now is a great time to stress-test your plan and make adjustments while you still have choices. Sequence risk is real, but it’s also manageable—especially when you plan for it before the market forces you to.