Understanding Sequence of Returns Risk in
Retirement Planning
Table of Contents
When it comes to retirement, how much you’ve saved is only part of the equation—when you experience market gains and losses can be just as important. This is where sequence of returns risk comes into play. Poor investment returns early in retirement—when you’ve just started withdrawing from your portfolio—can significantly shorten the lifespan of your savings. Even a well-funded retirement plan can be thrown off course if market downturns align with early withdrawal years. Understanding this risk is important for retirees who want a sustainable income stream that lasts.
What is Sequence of Returns Risk?
Sequence of returns risk refers to the impact that the order of investment returns has on a portfolio—especially when withdrawals are occurring. While long-term average returns might look favorable, the sequence in which gains and losses occur can lead to very different outcomes.
Unlike those still accumulating wealth, retirees need to take income even during down markets. Early losses combined with withdrawals can reduce portfolio value quickly, leaving less principal to recover when the market rebounds.
This risk is especially important for retirees depending on investments for income. Even portfolios with solid long-term performance can fall short if the return order is unfavorable.
Why It’s a Major Concern for Retirees
Withdrawals magnify the impact of early losses. When a portfolio drops in value and you’re drawing income at the same time, you’re forced to sell assets at lower prices, which can lock in losses and reduce future growth potential.
This creates a compounding effect: as the portfolio shrinks, it becomes harder for it to recover—even if the market performs well later. The early years of retirement are a critical window, and volatility during this time can greatly influence how long your money lasts.
Real-Life Examples and Case Studies
Let’s look at two hypothetical retirees—Mark and Susan—each retiring with $1 million and withdrawing $50,000 annually. Both experience the same average return over 20 years, but the sequence is different.
- Mark sees strong market performance early in retirement, giving his portfolio a cushion before any downturns.
- Susan retires into a market decline, and early withdrawals during those down years erode her portfolio quickly.
This visual demonstrates how timing—not just average return—can dramatically affect retirement outcomes. It’s a real risk that deserves serious attention in your planning.
Strategies to Reduce Sequence of Returns Risk
Effectively managing this risk requires more than a diversified portfolio. It involves building flexibility into your income strategy and planning for market variability. Here are three practical strategies:
Diversify Income Sources
Depending solely on investment withdrawals adds pressure during market dips. Incorporate multiple income streams—such as pensions, annuities, or even part-time work—to reduce reliance on portfolio draws. These sources can help cover essential expenses in tough years, preserving your investments for the long term.
Maintain a Cash Reserve
A cash reserve can serve as a buffer during downturns. Having one to two years’ worth of living expenses in a liquid account allows you to avoid withdrawing from investments when markets are down. This gives your portfolio breathing room to recover and supports a more stable income strategy.
Flexible Withdrawal Strategies
Rigid withdrawal plans—like withdrawing a fixed amount annually—can accelerate portfolio depletion if markets fall early. Dynamic strategies may offer a better approach.
Methods like the Guyton-Klinger rules or simple percentage-based withdrawals adjust your income based on portfolio performance. This adaptability can help you preserve your savings and adds resilience in volatile markets.
Role of a Financial Advisor in Managing This Risk
Managing sequence of returns risk isn’t about reacting to market swings—it’s about proactive, personalized planning. A financial advisor can help you build a strategy that accounts for timing, income needs, and changing market conditions.
Advisors model return scenarios, structure withdrawals strategically, and adjust your plan as circumstances evolve. They can also help implement income diversification, maintain a reserve fund, and guide you in choosing a flexible withdrawal strategy that fits your risk tolerance.
Ongoing oversight—like portfolio rebalancing and annual reviews—can make all the difference in protecting your retirement income over time.
Conclusion
Sequence of returns risk is one of the most important yet often overlooked aspects of retirement planning. Even with sufficient savings, poor timing can put long-term income at risk.
By planning ahead with strategies like income diversification, cash reserves, and dynamic withdrawals, you can build a retirement plan designed to weather market uncertainty.
If you’re nearing or already in retirement, now is the time to make sure your strategy accounts for this risk. Connect with an advisor at Insight Wealth Strategies to review your plan and explore ways to strengthen your retirement income—so you can retire with greater confidence and peace of mind.
Reviewed by,
Chad Seegers, CRPC®
Chad began his career with Sagemark Consulting in 2005 and then became a Select member of Sagemark’s Private Wealth Services which operated as a national resource for financial planners focusing on Advanced Strategies in the High Net Worth marketplace. Chad then began his partnership with Insight Wealth Strategies in 2013 focused on retirement planning primarily with Oil and Gas employees and executives. His primary areas of expertise are retirement, estate, and investment strategies as he serves as Investment Strategist for the financial planning team.
Insight Wealth Strategies, LLC is a Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where Insight Wealth Strategies, LLC and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Insight Wealth Strategies, LLC unless a client service agreement is in place.
Insight Wealth Strategies, LLC (IWS) and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
