Retiring at the Wrong Time Can Cost You Big: Understanding Sequence of Returns Risk

Planning for retirement requires more than just saving diligently; timing and strategy play a crucial role in ensuring financial security. One of the biggest but often overlooked risks retirees face is sequence of returns risk—a factor that can significantly impact how long your savings last. This risk arises when poor market performance coincides with the early years of retirement, leading to potential financial shortfalls.
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In this guide, we’ll explain what sequence of returns risk is, review a compelling case study from a US Bank white paper, and explore practical strategies to mitigate its effects. If you’re serious about retirement planning, minimizing taxes, and securing long-term financial stability, this is a must-read.
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What Is Sequence of Returns Risk?
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While the stock market has historically provided an average return of around 10% per year, those returns fluctuate significantly. Some years see gains of 25%, while others experience losses of 20% or more. This volatility can have severe consequences for retirees who rely on withdrawals from their portfolios.
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Sequence of returns risk refers to the danger of experiencing significant market declines early in retirement while making withdrawals. Unlike an investor who remains in the accumulation phase (continuing to contribute to investments), retirees cannot easily recover from these losses since they are withdrawing funds rather than investing new capital. A bad sequence of returns at the start of retirement can drain savings much faster than if those same losses occur later.
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A Case Study: The Impact of Sequence of Returns on Two Retirees
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To illustrate how sequence of returns affects retirement savings, let’s examine a study by US Bank. The study compares two retirees, each starting retirement with $1 million and following the 4% withdrawal rule, meaning they withdraw $45,000 per year, adjusted for 3% inflation.
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Retiree #1: Favorable Market Conditions
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• Year 1: +25% market return
• Year 2: +10% market return
• Year 3: +5% market return
• Year 4: -15% market return
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Retiree #2: Unfavorable Market Conditions
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• Year 1: -15% market return
• Year 2: +5% market return
• Year 3: +10% market return
• Year 4: +25% market return
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Even though both retirees experience the same average returns over time, their outcomes are drastically different. Retiree #1’s savings continue to grow, lasting over 40 years, while Retiree #2 runs out of money in just 25 years. The key difference? Retiree #2 suffered early losses while withdrawing funds, making it impossible to recover even when market conditions improved later.
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How to Protect Your Retirement from Sequence of Returns Risk
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Fortunately, several strategies can help retirees mitigate this risk and ensure financial security.
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1. The Bucket Strategy: Segmentation for Stability
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One of the most effective ways to manage sequence of returns risk is using a retirement bucket strategy. This approach segments your savings into three different “buckets” based on risk tolerance and time horizon:
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• Short-Term Bucket (0-3 years of expenses): Cash, CDs, money market accounts, or other low-risk assets. These provide liquidity and stability to fund immediate expenses without selling investments at a loss.
• Medium-Term Bucket (3-10 years of expenses): Bonds, fixed income investments, and conservative assets that provide moderate returns while maintaining lower volatility.
• Long-Term Bucket (10+ years of expenses): Stocks and higher-risk investments with the potential for greater long-term growth to outpace inflation.
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By drawing from short-term reserves during market downturns, retirees avoid selling stocks at depressed prices, allowing their long-term investments time to recover.
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2. Rely on Fixed Income Sources
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A strong foundation of fixed income sources can help retirees reduce their reliance on portfolio withdrawals, making them less vulnerable to market fluctuations. Consider these options:
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• Delaying Social Security Benefits: Waiting until full retirement age (or even age 70) increases your monthly Social Security benefit, providing a larger guaranteed income.
• Annuities: Some retirees allocate a portion of their savings to annuities, ensuring a steady income stream regardless of market performance.
• Pension Income: If you have access to a pension, maximizing benefits can provide financial stability and reduce dependence on investments.
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By covering essential expenses with these fixed sources, you can limit withdrawals from your market-dependent accounts, reducing exposure to early retirement downturns.
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3. Use a Dynamic Withdrawal Strategy
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Rather than withdrawing a fixed amount each year regardless of market performance, a dynamic withdrawal strategy allows retirees to adjust withdrawals based on portfolio performance. A popular approach is using retirement income guardrails, which include:
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• Spending reductions in bad market years (e.g., decreasing withdrawals if portfolio value drops beyond a certain threshold).
• Spending increases in good market years, allowing retirees to enjoy more discretionary spending when markets perform well.
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This flexibility helps preserve capital during downturns and maximizes spending potential when conditions improve.
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4. Tax-Efficient Withdrawal Strategies
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Effective tax planning can also play a key role in minimizing the impact of sequence of returns risk. Consider these tax-efficient withdrawal techniques:
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• Withdraw from taxable accounts first: This allows tax-advantaged retirement accounts (like IRAs and 401(k)s) to continue growing tax-deferred.
• Manage Required Minimum Distributions (RMDs): Planning for RMDs can prevent forced withdrawals from tax-advantaged accounts at inopportune times.
• Roth Conversions: Converting a portion of traditional retirement accounts to Roth IRAs in lower-income years can reduce future tax burdens.
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Strategic withdrawals can reduce the impact of taxes on your retirement portfolio, improving overall longevity and stability.
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Key Takeaways: Preparing for a Secure Retirement
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• Sequence of returns risk can significantly impact how long your retirement savings last. Poor market performance early in retirement can cause premature depletion of funds.
• Implementing a bucket strategy helps preserve capital by providing a structured withdrawal plan that minimizes the need to sell assets during downturns.
• Fixed income sources like Social Security, annuities, and pensions offer stability and reduce dependence on volatile markets.
• Using a dynamic withdrawal strategy can help retirees adapt to changing market conditions while ensuring financial longevity.
• Tax-efficient planning enhances retirement security, ensuring that unnecessary tax burdens do not accelerate portfolio depletion.
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Final Thoughts
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Retiring at the wrong time—especially during a market downturn—can drastically impact your financial future. However, by understanding sequence of returns risk and implementing smart retirement planning strategies, you can better protect your savings and ensure a stable income throughout your golden years.
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If you’re looking for personalized guidance on retirement, taxes, and investment planning, consider working with a Certified Financial Planner (CFP®) to create a strategy tailored to your unique financial goals.
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Have questions about retirement planning? Drop them in the comments below or reach out for a consultation!

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