Imagine two people who retire on the same day.

Each has invested $1,000,000.

Each withdraws $50,000 per year to live on.

Each earns an average annual investment return of 7% over the next ten years.

So they'll have the same outcome...

Right?

Surprisingly, no.

The order in which those investment returns occur can dramatically change the outcome.

That's called Sequence of Returns Risk, and it's one of the biggest risks retirees face.

An Easy Example

Let's look at two retirees.

Retiree A

The stock market performs poorly during the first few years of retirement.

Year 1: -20%

Year 2: -15%

Year 3: -10%

Then the market recovers over the following years.

Retiree B

Retiree B experiences the exact same returns...

Just in the opposite order.

The strong years happen first.

The bad years happen later.

Here's the surprising part:

Both retirees earned exactly the same average investment return.

Yet Retiree B is likely to finish retirement with substantially more money.

Why?

Because Retiree A was forced to withdraw retirement income while the portfolio was declining.

Why This Happens

When you're still working and contributing to retirement accounts, market declines are frustrating—but they're often temporary.

You're buying investments while prices are lower.

Retirement changes everything.

Instead of adding money to your portfolio...

You're taking money out.

Imagine withdrawing $50,000 after a 20% market decline.

Those investments are no longer available to participate in the eventual recovery.

You've permanently reduced the number of shares working for you.

That's what makes early market declines so damaging.

Why Average Returns Can Be Misleading

Many retirement calculators assume an average rate of return.

Real life doesn't work that way.

Markets don't deliver the same return every year.

Some years are excellent.

Some are terrible.

The sequence of those returns matters most during the early years of retirement, when your investment portfolio is largest and you're beginning regular withdrawals.

Can Sequence Risk Be Eliminated?

No.

But it can often be managed.

One of the biggest misconceptions is that the answer is simply to become extremely conservative.

Unfortunately, that creates a different problem.

Retirement may last 25 or 30 years.

You still need your investments to grow faster than inflation.

Instead, we believe the goal is to build a retirement strategy that allows you to weather difficult markets without making emotional or financially damaging decisions.

How We Help Manage Sequence Risk

Sequence of Returns Risk isn't solved by one investment.

It's managed through a combination of planning decisions.

Depending on your situation, those decisions may include:

  • Maintaining an appropriate mix of stocks and bonds.
  • Keeping adequate cash reserves for near-term spending.
  • Building a flexible withdrawal strategy.
  • Coordinating withdrawals from taxable, tax-deferred, and Roth accounts.
  • Managing taxes over your lifetime.
  • djusting spending during unusually difficult market environments when appropriate.

Each of these decisions helps create flexibility.

And flexibility is one of the best defenses against sequence risk.

Why This Matters

Many people spend years trying to earn an extra one percent on their investments.

Ironically, avoiding poor decisions during the first few years of retirement may have an even greater impact on long-term success.

Sequence of Returns Risk reminds us that retirement isn't simply about earning good returns.

It's about earning those returns while generating dependable retirement income.

Final Thoughts

Retirement investing is very different from retirement saving.

Before retirement, your focus is growing your portfolio.

After retirement, your focus shifts to making that portfolio last.

Understanding Sequence of Returns Risk is one of the keys to making that transition successfully.

If you're approaching retirement and would like to understand how investment strategy, retirement income, tax planning, Roth conversions, Social Security, and withdrawal strategies all work together, we'd be happy to have a conversation.