When it comes to retirement planning, most people think in terms of averages — average returns, average spending, average lifespan. But there’s one factor that has nothing to do with averages and everything to do with timing: sequence of returns risk.
This lesser-known concept can have a big impact on whether your money lasts through retirement. Let’s break it down.
What Is Sequence of Returns Risk?
Imagine two retirees with the same investments, same returns, and same withdrawal strategy — but one retires right before a market downturn, and the other right after. Even though they both earned the same average return, the retiree who hit the downturn early may run out of money much sooner.
That’s sequence of returns risk: the danger that poor market returns early in retirement can seriously hurt your portfolio, even if the market eventually recovers.
Why This Risk Peaks Around Retirement
There’s a window of time where your nest egg is most vulnerable — I call this the “retirement risk zone”: the 10 years before and after retirement.
Here’s why it matters:
During this time, your portfolio is likely at its highest value due to decades of saving and compounding.
Large losses during this stage are harder to recover from — especially if you’re making withdrawals.
Studies show that nearly half of your retirement savings are built in just the final 10 years before retirement.
If a major market decline happens during this period, the damage is amplified — especially if you’re already drawing income.
A Real-World Example
A study tested what would happen if a retiree experienced a single market shock of -21.6% at different stages:
If the shock occurred 20 years before retirement, it reduced wealth at retirement by 16%.
If the same shock happened at retirement, wealth was reduced by nearly 25%.
And if it hit during retirement, the chance of running out of money by age 85 could jump to over 50%.
Same shock. Very different results — depending only on timing.
What Can You Do About It?
The good news? Sequence of returns risk can be managed. Here are a few strategies I may recommend:
Adjust Asset Allocation
Lower your stock exposure as you approach retirement.
Consider more defensive or diversified investments.
Adjust your allocation if your goals are already funded — there's no need to take extra risk.
Create a Safety Net
Set aside a cash buffer (or use tools like reverse mortgages or life insurance).
Use income annuities or bond ladders to cover essential expenses.
Be Flexible With Withdrawals
Reduce withdrawals in down markets to give your portfolio time to recover.
Spend more conservatively overall if your situation allows.
Protect the Downside
Some retirees explore strategies like options, income guarantees, or structured products to limit large losses.
Final Thoughts
Retirement planning isn’t just about growing your money — it’s about protecting it at the right time. By understanding sequence of returns risk and building a strategy that considers timing, not just performance, you’ll be in a better position to enjoy a stable, confident retirement.
If you're nearing retirement or recently retired, let’s talk. I can help review your investment strategy and income plan to make sure you’re protected from risks that don’t show up in the averages — but can make all the difference.