The Hidden Retirement Threat: Understanding Sequence of Returns Risk

Why the order of your investment returns could matter more than the average and how to protect your future.

When it comes to retirement planning, most people focus on one question: How much do I need to save?

That’s a good question, but it’s not the only one that matters.

There’s a lesser-known risk that could quietly unravel your retirement plan, even if you’ve saved diligently and invested wisely. It’s called sequence of returns risk, and it’s one of the most overlooked yet powerful factors in retirement planning.

What Is Sequence of Returns Risk?

Sequence of returns Risk refers to the impact that the timing of your investment returns has on your portfolio, especially once you start withdrawing funds in retirement.

If you experience poor market performance early in retirement while simultaneously making withdrawals, your portfolio could shrink much faster than expected. Even if the overall average return is the same over time, starting with a few bad years can do long-term damage.

It’s not just how much your investments return; it’s when they return it.

A Tale of Two Retirees: Alice vs. Bob

To bring this to life, let’s imagine two retirees: Alice and Bob.

• Both retire with $1,000,000.

• Both withdraw $50,000 annually to fund their lifestyle.

• Both experience an average annual return of 6% over 10 years.

But here’s the catch: Alice experiences negative returns in the early years, while Bob sees positive returns early on.

Even though they average the same return, Bob ends up with a significantly higher remaining balance simply because his good years came first.

Why? Because Alice’s early losses combined with her withdrawals mean she’s selling investments while they’re down, locking in losses and reducing her future growth potential.

Why It Matters

During the accumulation phase (your working years), the sequence of returns doesn’t matter much; as long as you’re not withdrawing, the portfolio has time to recover.

But in retirement, withdrawals change the game. Pulling money from a shrinking portfolio can create a downward spiral that’s hard to reverse.

Sequence risk is why some retirees run out of money even when the market performs well over time, because they hit turbulence early on and never fully recover.

How to Protect Yourself

Here are several smart strategies to reduce sequence of returns risk:

1. Build a Cash Reserve

Keep 1–2 years of expenses in a cash or bond account. If the market dips, draw from your reserve instead of your investments, giving your portfolio time to rebound.

2. Diversify Your Investments

A well-balanced portfolio with stocks, bonds, and other asset classes can reduce volatility and soften the blow of downturns.

3. Be Flexible with Withdrawals

Don’t lock yourself into a fixed withdrawal amount. In years with poor market performance, consider trimming your spending slightly to preserve capital.

4. Delay Retirement (If Possible)

Each additional year of work means more savings, more growth, and one less year of withdrawals, a triple win in managing sequence risk.

5. Explore Guaranteed Income Options

Annuities and other income-producing products (used wisely) can help stabilize your income, reduce reliance on the market, and lower sequence risk.

Final Thoughts

Sequence of returns Risk isn’t something most financial commercials talk about, but it’s one of the biggest dangers to your retirement security.

Thankfully, with awareness and smart planning, you can reduce its impact. The key is to build a strategy that isn’t just about how much you save but also about how and when you withdraw.

Don’t let a few early bad years derail decades of careful planning. Understand the risks, build your buffer, and give yourself the flexibility to weather any storm.

Your retirement should be a time of peace, not financial panic.