Key Takeaways:
- The order of your returns can matter once you start withdrawing. Two retirees can earn the same returns and still end up with different balances. Sequence-of-returns risk is the chance that losses show up at a bad time for your withdrawals.
- Selling during a downturn leaves fewer shares to recover. When prices drop, you have to sell more of your investments to get the same amount of cash. Those shares aren’t there when markets bounce back.
- Planning for a rough start can help more than planning around an average. Cash for near-term spending, flexible spending, and steady income from Social Security or a pension can ease the pressure on your portfolio. None of them removes the risk, but they give you more choices in a bad year.
For decades, your paycheck showed up whether the stock market had a good week or a bad one. In retirement, a big part of that paycheck has to come from your savings, because Social Security usually covers only part of it. If you start benefits at full retirement age in 2026, Social Security replaces about 43% of a medium earner’s past income, according to the Social Security Administration.¹
The rest often comes from selling investments every year, no matter what prices are doing that year. That’s why the timing of market drops can shape how long your savings last, sometimes as much as the returns themselves.
What Is Sequence-of-Returns Risk?
Sequence-of-returns risk is the chance that poor market returns arrive early in retirement, right when you’re pulling money out. The same returns in a different order could leave you with more money. The risk comes from losses and withdrawals happening at the same time.
While you’re working and saving, a down year hurts, but you usually don’t have to sell. You can wait for prices to come back. Once you’re living on your savings, you may have to sell to pay the bills whatever the market is doing. The Society of Actuaries describes sequence risk as the timing of withdrawals forcing a larger part of your account to be sold, which can lower the overall return available to you.²
If no money goes in or out, the order of returns doesn’t change where you end up. That surprises a lot of people, and two hypothetical retirees make it easy to see.
A Simple Example: Two Retirees, Same Returns, Different Results
This example is hypothetical and for illustration only. Retiree A and Retiree B each start with $500,000 and take out $25,000 at the start of every year for five years. Both get the same five yearly returns of -15%, -10%, +8%, +12%, and +15%, which average out to 2% a year, and the only difference is the order, since Retiree A gets the losses first and Retiree B gets them last. The example ignores taxes, inflation, and fees, and the figures aren’t predictive of your results. These are their balances at the end of each year:
| Year | Retiree A Return | Retiree A Balance | Retiree B Return | Retiree B Balance |
| 1 | -15% | $403,750 | +15% | $546,250 |
| 2 | -10% | $340,875 | +12% | $583,800 |
| 3 | +8% | $341,145 | +8% | $603,504 |
| 4 | +12% | $354,082 | -10% | $520,654 |
| 5 | +15% | $378,445 | -15% | $421,306 |
After five years, Retiree A has about $378,000 left and Retiree B has about $421,000. That’s a gap of roughly $43,000, even though both took out the same $125,000 and earned the same returns.
The gap comes from what got sold and when. In Retiree A’s first two years, each $25,000 came out of a shrinking account. More of the portfolio was sold at low prices, so those dollars missed the good years that came next.
Now take the withdrawals away. With nothing coming out, both retirees would end up at about $532,000. The order only mattered because money was leaving the account.
Why the Early Years of Retirement Can Carry Extra Weight
A loss early in retirement hits your portfolio when it still has many years of spending to cover. The balance is lower, withdrawals keep going, and each withdrawal takes a bigger bite out of what’s left.
Every share you sell in a down year is a share that can’t grow when prices recover. That effect can follow you for years, because later gains are working on a smaller pile of money.
A bad start doesn’t doom a plan, though. How much it hurts depends on how much you withdraw, what returns come later, how much other income you have, and what you change along the way.
Why a Good Average Return Doesn’t Tell the Whole Story
Both retirees averaged 2% a year. That number looks identical on paper and tells you nothing about who had more money left at the end.
An average return describes how investments did over a stretch of time. Sequence-of-returns risk is about what the order of those returns does to someone taking money out. A retirement plan built on one steady average assumes every year looks alike. Markets rarely work that way, so a plan can look fine on paper and still feel strained after a rough start.
How Retirement Income Planning Can Help Manage Sequence Risk
You can’t control the order of market returns. You can control how much pressure your plan puts on your portfolio when a bad year shows up. These planning tools each come with a trade-off, and none of them removes the risk.
Holding Cash for Near-Term Spending
Money set aside for your next stretch of withdrawals may let you keep paying yourself without selling investments while prices are down. The trade-off is that cash can lose buying power to inflation and miss out on growth. How much to hold and where to keep it is its own question, covered in how much cash you should keep in retirement.
Building Flexibility Into Your Spending
Split your budget into what you have to pay and what you’d like to pay for. Groceries, housing, and insurance usually stay, while travel, gifts, and big projects can sometimes wait a year. FINRA (the Financial Industry Regulatory Authority) suggests being ready to cut back on extras if your portfolio has a losing year.³
The trade-off is that you may have to put off plans you care about. Knowing how much monthly income you’ll need in retirement makes it easier to see which costs can bend.
Leaning on Social Security, Pensions, and Other Steady Income
Income that arrives whether markets are up or down means your portfolio has to cover less of each month. The less you need to sell in a bad year, the less damage that year can do. When you start Social Security also changes how much your savings carry in the early years. Fitting these pieces together is part of building a retirement income plan that replaces your paycheck.
Reviewing How Much and When You Withdraw
Bigger withdrawals put more strain on a portfolio during a downturn. Some retirees trim their withdrawals after a losing year instead of taking the same amount no matter what. Which accounts you pull from matters too, mostly for taxes, and how withdrawal strategies impact your taxes in retirement covers that side.
Stress-Testing Your Plan Against Different Return Orders
Instead of planning around one average, look at how your plan holds up with a good start and with a bad one. Try different withdrawal amounts as well. The goal is to know ahead of time what you’d change if a bad stretch came early, rather than to guess what markets will do.
Why Investment Decisions Belong Inside Your Income Plan
How your investments perform can’t be judged by itself. What counts is whether your portfolio can keep funding the spending you need from it, year after year, through good markets and bad ones.
The right approach depends on your spending, how long the money needs to last, your other income, how much risk you can live with, and how much you could cut back if you had to. Building the portfolio itself is a bigger topic for another day. What happens to a plan if the market drops right after retirement is a regular part of financial planning for pre-retirees and retirees.
Sequence-of-Returns Risk FAQs
1. How Many Years Does Sequence-of-Returns Risk Last?
There’s no set cutoff. The risk tends to be highest in the years around when you start withdrawing, because losses then affect every withdrawal that follows. As time passes and fewer years of spending are left to cover, the order of returns usually carries less weight.
2. Does Sequence-of-Returns Risk Matter Before You Retire?
It can in the last few years before you retire. A market drop right before your first withdrawal shrinks the balance you start retirement with. Earlier in your career, when you’re adding money and not selling, the order of returns matters much less.
3. Is Sequence-of-Returns Risk the Same as Market Risk?
Not quite. Market risk is the chance that your investments lose value. Sequence-of-returns risk is about when those losses happen compared to when you’re taking money out. You face market risk any time you invest, while sequence risk mostly shows up once withdrawals begin.
Stress-Testing Your Retirement Income Plan for Market Downturns
At Capstone Wealth Partners, we look at how your withdrawals, income sources, and spending flexibility work together. Then we test your plan against different return orders, including a rough start, so you can see how it might respond and what you’d adjust before a downturn shows up.
If you’d like to see how your plan holds up when markets don’t cooperate, we invite you to schedule a complimentary consultation with our team.
Resources:
- Understanding the Benefits, Social Security Administration
- Managing Post-Retirement Risks, Society of Actuaries
- Managing Your Retirement Portfolio, FINRA
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