How Sequence of Returns Risk Can Ruin Retirement
When it comes to retirement planning, average returns don’t tell the whole story. Even if your portfolio earns the same long-term return as someone else’s, you could run out of money faster simply because of when bad years hit.
This is called Sequence of Returns Risk, and it’s one of the most dangerous threats to your retirement security.
In this post, we’ll break down what sequence of returns risk is, show a real-world example, and give you smart strategies to protect yourself especially if you’re retiring in 2025 or soon after.
What Is Sequence of Returns Risk?
Sequence of Returns Risk refers to the danger that you’ll experience poor investment performance early in retirement — when you’re withdrawing from your portfolio.
Even if your portfolio averages 6–7% annually over time, negative returns in the early years can deplete your nest egg faster and leave less capital to recover when markets bounce back.
Real Example: Same Average Return, Very Different Outcomes
Let’s take two hypothetical retirees Alex and Jordan who both retire with $1,000,000 and withdraw $40,000 annually (adjusted for inflation). Their portfolios earn the exact same average return over 30 years: 6.1%.
The only difference? The order of returns.
| Year | Alex (Good Early Years) | Jordan (Bad Early Years) |
|---|---|---|
| 1 | +12% | -12% |
| 2 | +10% | -10% |
| 3 | +8% | -8% |
| 4-30 | Mixed returns averaging 6.1% | Same |
Outcome after 30 years:
- Alex ends with $1.2 million
- Jordan runs out of money in Year 23
Why? Because Jordan had to sell investments at lower prices during the early bad years locking in losses and reducing the base that future gains could grow from.
Why This Matters for 2025 Retirees
If you’re planning to retire in 2025, consider the economic backdrop:
- Markets are recovering from recent volatility
- Interest rates remain uncertain
- Inflation still impacts real returns
This environment could trigger the kind of early poor returns that make sequence risk a serious concern.
Strategies to Protect Against Sequence Risk
You can’t control the market, but you can control your withdrawal strategy and portfolio structure to minimize damage.
1. Use a Bucket Strategy
Segment your retirement savings into:
- Bucket 1 (Cash/Short-Term): 1–3 years of expenses
- Bucket 2 (Bonds): 3–7 years of stable income
- Bucket 3 (Stocks): Long-term growth
If markets dip early, you spend from Bucket 1 or 2, giving Bucket 3 time to recover.
2. Delay Withdrawals or Social Security
If possible, delay retirement or withdrawals from your portfolio. This helps:
- Reduce pressure on investments in the early years
- Let your money grow (or avoid shrinking) longer
- Potentially increase your Social Security benefits
3. Flexible Withdrawals
Avoid a rigid 4% rule. Consider:
- Lowering withdrawals in bad years
- Increasing withdrawals in good years
- Following a “guardrails” strategy (e.g., Guyton-Klinger)
4. Partial Annuities
A fixed annuity can provide guaranteed income no matter market conditions, helping reduce pressure on your portfolio during downturns.
5. Rebalancing and Tax-Efficient Withdrawals
Make sure to sell from winners and maintain your asset allocation. Also, pull from tax-advantaged accounts carefully to minimize taxes and maximize net income.
Final Takeaway
Sequence of returns risk can devastate even well-prepared retirees especially those who start withdrawing during market downturns. But with the right withdrawal strategy and a well-diversified portfolio structure, you can weather early volatility and stay on track.
Coming up next:
>> Using Bucket Strategy to Guard Against Sequencing Risk
This next post will show you exactly how to implement a bucket approach to protect your retirement income.
