Why the Timing of Your Gains or Losses Matters More Than You Think in Retirement
Understanding Sequence of Returns Risk and How to Protect Your Nest Egg
Seeing your account value go down is never enjoyable. When you’re saving for retirement though, market ups and downs can feel like background noise. You’re adding to your portfolio regularly, and time is on your side.
But once you retire and start drawing income, a new risk emerges, one that even many seasoned investors overlook: Sequence of Returns Risk.
Here’s what it means, why it matters, and how smart planning can help you manage it.
What Is Sequence of Returns Risk?
It’s the risk that poor market returns early in retirement, when you’ve started withdrawing income — can permanently damage your portfolio’s longevity.
Same Average Return — Different Outcomes
Consider two retirees who both earn an average of 6% annually over 30 years.
- One experiences strong markets early on, then weaker markets later.
- The other hits a downturn in the first few years.
Even though their average return is identical, the retiree who faced early losses could run out of money far sooner.
Why It Matters Most for Retirement Savers 50+
If you’re nearing or entering retirement, this risk is front and center. The order — or sequence — of returns in those first 5–10 years can have an outsized impact on your long-term financial security.
How to Manage Sequence of Returns Risk
The good news? You can plan for it. Here are a few common strategies:
Maintain a cash reserve or buffer
Having 1–2 years of income needs in cash or very short-term investments can help you avoid selling stocks in a downturn.
Build a diversified income strategy
Combining income sources (such as bonds, dividends, guaranteed annuities, or Social Security) can ease reliance on portfolio withdrawals.
Use guardrails-based planning
Dynamic withdrawal approaches such as income guardrails adjust withdrawals based on market conditions to help mitigate this risk. This approach also allows you to increase your spending during good markets generally more so than static withdrawal strategies.
The Bottom Line
The first years of retirement are a critical window. Sequence of returns risk can’t be eliminated, but with thoughtful planning, it can be managed helping you retire with greater confidence.
If you’re preparing for retirement or have questions about protecting your nest egg, we’re here to help. Let’s talk about building a plan that works for you.
