Reading time: 5 minutes
Published: June 15, 2025
Modified: August 23, 2025
Retirement is something many of us dream about: no more daily grind, just time to relax and do what we love. But making your money last through those years? That’s where things get tricky. One of the less obvious financial hurdles retirees face is something called sequence of returns risk, and it can quietly derail even the most carefully planned portfolio.
Key Takeaways
- Sequence of returns risk affects retirees when market downturns occur early in retirement, impacting portfolio sustainability.
- The order of market gains and losses matters more than the average return over time.
- Strategies to mitigate this risk include maintaining a cash buffer and using a bond ladder.
- Delaying withdrawals or adjusting withdrawal rates during downturns can help preserve your portfolio.
What Is Sequence of Returns Risk And Why Should You Care?
You’ve probably heard that the stock market goes up and down, but averages out over time. That’s true, but if those “downs” hit early in your retirement, they can cause real damage. Why? Because you’re no longer just riding out market dips; you’re withdrawing money to live on. And pulling funds during a downturn can lock in losses you might not recover from.
It’s not just how much you earn over time, but when those gains (or losses) happen that really matters.
Consider This Scenario
Consider the following two simplified scenarios, both with a starting portfolio of $1,000,000 and an annual withdrawal of $50,000. Both assume average returns over 5 years are the same, but the sequence of those returns makes a big difference.
- Scenario A: a strong start with a later loss.
- Yearly Returns: +12%, +8%, -15%, +5%, +4%
- Scenario B: a poor start with later gains.
- Yearly Returns: -15%, +4%, +5%, +8%, +12%
In scenario A (see Table 1), the retiree experiences strong investment gains in the first couple of years after retirement. Even with some losses later on, the early growth helps the portfolio stay resilient. This scenario shows how positive early returns can cushion a retirement plan, even if the average return over time is the same.
| Year | Return | Withdrawal | End-of-Year Balance |
| 1 | +12% | $50,000 | $1,060,000 |
| 2 | +8% | $50,000 | $1,093,200 |
| 3 | -15% | $50,000 | $879,220 |
| 4 | +5% | $50,000 | $870,181 |
| 5 | +4% | $50,000 | $851,988 |
In scenario B (see Table 2), the loss occurs in the first year of retirement. In this case, the portfolio ends up with significantly less money after five years. This demonstrates how early losses can magnify the impact of withdrawals and jeopardize long-term financial security.
| Year | Return | Withdrawal | End-of-Year Balance |
| 1 | -15% | $50,000 | $807,500 |
| 2 | +4% | $50,000 | $759,780 |
| 3 | +5% | $50,000 | $744,769 |
| 4 | +8% | $50,000 | $754,350 |
| 5 | +12% | $50,000 | $792,872 |
Even though both portfolios experienced the same average return, the one that suffered early losses ended up with $59,116 less after just 5 years. This is the sequence of returns risk in action. Losses early in retirement, when you’re making withdrawals, hurt more than the same losses later on.
Smart Ways to Reduce the Risk
The good news? You’re not powerless. A few thoughtful moves can help you cushion your portfolio and reduce the risk of outliving your savings.
Revisit Your Portfolio Mix
As you approach retirement, or once you’re in it, it’s wise to check whether your investments still match your comfort with risk. Online tools, such as the Boldin financial planner ↗ (affiliated link), or a financial adviser can help you diversify or rebalance your portfolio to reduce exposure to big market swings, while still aiming for reasonable growth.
Even small shifts in your investment mix can help protect what you’ve worked so hard to build.
For more information on protecting your portfolio, you might find this one trick can help to protect your portfolio long-term.
Build a Cash Cushion
Keep enough in a savings or money market account to cover at least 6–12 months of living expenses. This lets you avoid tapping into investments when markets dip. You give your portfolio breathing room to recover before you start pulling money again.
Consider Investments That Generate Income
One way to reduce your reliance on withdrawing from stocks during market downturns is to focus on investments that provide regular income:
- Dividend-paying stocks are a good place to start. These are shares in companies that return a portion of their profits to shareholders in the form of regular payments. While they still carry market risk, they can provide steady income and potentially grow over time.
- A bond ladder is another option. It’s essentially a schedule of bonds that mature at staggered intervals (say, one year apart). This spreads out interest rate risk and gives you a predictable stream of cash, which can help cover expenses without having to sell off stock when prices are down.
- Finally, annuities offer another layer of security. These are insurance products that convert part of your savings into guaranteed income, either for a set period or for life. They’re worth exploring if you’re concerned about outliving your money or want more certainty in your retirement cash flow. However, annuities can be complex, with different types, fees, and terms, so it’s important to talk to a financial adviser before making a decision.
Be Flexible With Withdrawals
If markets take a hit, consider scaling back your spending temporarily. It’s not ideal, but easing off on withdrawals for a few months or a year can keep your overall plan on track. And if you can delay dipping into your retirement accounts for even a year or two, it can make a surprisingly big difference.
For more tips on managing withdrawals, read How to Calculate Your Required Minimum Distributions (RMDs).
Further Reading
If you want to dive deeper into the impacts of market downturns on retirement, check out this CNBC article ↗ on the sequence of returns risk.
Conclusion
It’s easy to feel overwhelmed when you hear about risks like this. But retirement isn’t about obsessing over every market move. It’s about knowing what’s out there and planning accordingly. Sequence of returns risk is real, but with some preparation and flexibility, it doesn’t have to control your retirement story.
Sequence of returns risk is a critical subject for anyone who isn’t living on a paycheck (retired or soon-to-be-retired, unfunded startup, yearlong sabbatical, etc.), thanks for covering it, Jerry!
I take an even more conservative approach–minimum of two years worth of living money in the cash bucket since bear markets can last longer than one year, as did the last two major bears (tech crash, finance crash). As Jerry noted, dividend and other sources of passive income can stretch your cash bucket and help you avoid selling equity in a depressed market.
Thanks, Steve! You make a great point about those last two bear markets; they can really take a toll on a portfolio. For example, a 30% loss requires a 43% gain just to break even.