Retirement Planning Series
Retirement · Sequence of Returns Risk
The Hidden Risk of
Early Retirement Years
Two retirees with identical average returns can have wildly different outcomes — one running out of money, the other dying with millions. The difference: WHEN those returns happen. Bad market years in early retirement can wreck a plan that would otherwise have worked.
S&P 500 return in 2008
A retiree drawing 4% in 2008 lost 41% of their portfolio (37% market drop + 4% withdrawal). The math to recover from that hole while continuing to draw is brutal. Retirees who started in 2007 vs. 2009 had very different outcomes.
The compounded loss
When you withdraw during a down market, you sell investments at the bottom. Those shares are gone — they can't participate in the recovery. The remaining portfolio has to do double duty: recover AND continue funding withdrawals. Many never catch up.
Three ways to defend against sequence risk
Cash + bond buffer (2-3 years of expenses)
Hold 2-3 years of living expenses in cash and short-term bonds. In down years, draw from those — don't touch stocks. Stocks have time to recover before you need them. Refill the buffer in good years.
Bucket strategy
Divide your retirement assets into three buckets: short-term (cash, 1-3 years), mid-term (bonds + dividend stocks, 4-10 years), long-term (growth equities, 10+ years). Draw from short-term. Refill from mid-term. Let long-term compound.
Guaranteed income floor (annuities, pensions, SS)
Cover your essential expenses (mortgage, food, healthcare, insurance) with guaranteed lifetime income. Annuities, pensions, and Social Security. Then use market-based investments for discretionary spending only. Market downturns no longer threaten your survival.
The window of vulnerability
Sequence risk matters MOST in the first 5-10 years of retirement. Once you're past that window — especially if early-year returns were good — your portfolio has typically built enough cushion that future downturns are recoverable. The years immediately around your retirement date are the critical ones to defend.
Defend your first decade of retirement
We'll structure a draw-down plan that survives a bad first 5 years — without sacrificing long-term growth.
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Sources
Educational content only. Past performance does not guarantee future results.