Timing Your Retirement: Why Sequence of Returns Risk Matters
When it comes to retirement planning, timing isn’t just important—it can be critical. You may have saved diligently for years, invested wisely, and built a solid nest egg. But the order in which you experience investment returns—the sequence of returns—can make or break how long that nest egg lasts.
For retirees, understanding this risk is essential to protecting income and enjoying a financially confident retirement.
What Is Sequence of Returns Risk?
Sequence of returns risk refers to the danger of experiencing poor market performance early in retirement.
When you’re saving for retirement, the ups and downs of the market matter less because you’re adding new money along the way. But once you retire and begin withdrawing from your portfolio, the timing of those ups and downs matters much more.
- If markets are strong in your early retirement years, your portfolio has time to grow, even as you withdraw from it.
- If markets decline early, withdrawals can lock in losses and make it much harder for your portfolio to recover.
In short: a bad first few years can put long-term retirement income at risk, even if average returns over time look the same.
A Simple Example
Imagine two retirees with identical portfolios and identical average returns over 20 years.
- Retiree A enjoys positive returns in the early years and negative returns later. Their portfolio grows enough early on to handle later losses.
- Retiree B experiences the same returns, but in reverse—poor returns at the start, better returns later. Because they withdrew funds during the downturn, their portfolio shrinks faster, leaving less money to benefit from the rebound.
The difference? Retiree A may stay financially secure, while Retiree B may run out of money much sooner.
How to Manage Sequence of Returns Risk
The good news is that with proper planning, you can reduce the impact of this risk. Some strategies include:
- Building a cash reserve or “bucket strategy.” Keep 1–3 years of living expenses in cash or conservative investments so you don’t have to sell during downturns.
- Flexible withdrawals. Adjust spending slightly in down years to give your portfolio room to recover.
- Diversification. A balanced mix of stocks, bonds, and other investments can help smooth returns.
- Delaying Social Security. Waiting to claim can provide higher guaranteed income, reducing pressure on your portfolio.
- Professional planning. A financial advisor can model scenarios and design withdrawal strategies that account for market volatility.
The Bottom Line
Retirement planning isn’t just about how much you’ve saved—it’s also about how you spend and protect those savings once you retire. The timing of market returns can play a bigger role than many people realize, and understanding sequence of returns risk can help you avoid costly mistakes.
As a Certified Financial Planner™, I help retirees and pre-retirees design income strategies that account for market ups and downs. With the right plan, you can feel confident that your retirement income will be there when you need it—no matter what the markets do in the early years.