Sequence of Returns Risk: Why Timing Matters in Retirement
Sequence of returns risk is the danger that poor market returns arrive early in retirement, just as withdrawals begin. It matters because the **order** of returns, not just the long-term average, can affect how long a portfolio lasts.
Think of it like farming. Two farms may get the same total rainfall over a season, but if one gets rain when crops are taking root and the other gets it after the damage is done, the harvest can look very different. Retirement income works the same way. The timing matters.
The order of returns can change the outcome
During your working years, market declines are frustrating, but paychecks usually cover spending and ongoing contributions may allow you to keep buying investments at lower prices.
In retirement, the math changes.
If you are selling investments for income while values are down, the portfolio has fewer shares left to participate in a recovery. The market may eventually rebound, but the dollars already withdrawn are no longer there to compound.
That is why two retirees with the same starting balance, the same withdrawals, and the same average return can end up with very different results. If the difficult years come early, withdrawals can lock in damage. If they come later, after years of growth, the portfolio may be better positioned to absorb them.
Sequence risk is often most important in the first decade of retirement, but it can show up anytime large withdrawals meet falling asset values. Much like a farm can survive a rough season after years of strong harvests, portfolios often have a better chance of weathering downturns after growth has already had time to build reserves.
Why the early retirement years carry extra weight
The early years of retirement matter because the portfolio is often near its largest, withdrawals are just beginning, and the plan has not had much time to build a cushion.
Inflation can add pressure. As of April 2026, the Consumer Price Index was up 3.8% from a year earlier, according to the Bureau of Labor Statistics. Even moderate inflation can require larger withdrawals over time.
That combination can be difficult: markets are down, costs are up, and the retiree may need to sell more shares to maintain the same lifestyle.
There is also a behavioral side. Early losses can shake confidence. A person who felt comfortable with risk while working may feel differently once the paycheck stops. Selling growth assets after a downturn can turn a temporary market decline into a lasting planning problem.
Farmers understand this instinctively. A bad season early, before equipment is paid off or reserves are built, can create far more stress than the same setback years later when operations are stronger and there is more margin for error.
Sequence risk is a cash-flow issue, not just an investment issue
It is easy to think sequence risk is only about stock and bond allocations. Investments matter, but the bigger issue is how the entire retirement income plan fits together.
Spending, taxes, Social Security timing, cash reserves, pensions, and required distributions all affect how much pressure lands on the portfolio during difficult markets.
For example, if more essential expenses are covered by Social Security, pensions, or other predictable income sources, the portfolio may not need to do as much heavy lifting during a downturn. That is one reason claiming decisions should be coordinated with the rest of the plan. The 2025 Social Security Trustees Report projected that the combined trust funds could pay scheduled benefits through 2034, and about 81% of scheduled benefits after that absent legislative changes (SSA Trustees Report).
If you want to think more about claiming choices, our article on how Social Security timing changes the answer is a helpful companion.
Taxes matter too. Pulling heavily from tax-deferred accounts during a down market can reduce future flexibility and may create a larger-than-expected tax bill. Required minimum distributions can add another layer. The IRS notes that required minimum distributions generally begin after age 73 for many retirees (IRS retirement plans).
In other words, the portfolio does not exist in a vacuum. It serves spending. Just like a farm is not built around tractors alone, a retirement plan is not built around investments alone. Cash flow is what keeps the operation running.
A practical defense: build income by purpose
There is no single investment mix that eliminates sequence risk. A portfolio that is too aggressive may expose retirees to deeper early losses. A portfolio that is too conservative may struggle to keep up with inflation over a long retirement.
A more useful starting point is cash-flow design.
Which dollars may be needed soon?
Which dollars can stay invested longer?
Which accounts provide tax flexibility?
Which expenses are essential, and which are adjustable?
On the farm, you do not store seed, feed, fuel, and equipment in one undifferentiated pile. Each has a job. Retirement assets benefit from the same kind of organization.
Near-term spending may need more stability. Longer-term money may need growth. Taxable, tax-deferred, and tax-free accounts may each play different roles.
We explain this more in our framework for organizing retirement assets by purpose. The goal is not to avoid all market volatility. The goal is to avoid being forced into poor decisions when markets are down.
Flexibility also helps. A retiree who can trim discretionary spending, delay a large purchase, use cash reserves, or adjust withdrawal sources may have more options during a rough market stretch.
That flexibility can be more valuable than trying to predict the next downturn. Farmers rarely control the weather, but they do prepare for changing conditions. Retirement planning works the same way.
Growth still has a role
Some retirees hear about sequence risk and assume the answer is to avoid growth assets altogether. That can create a different problem.
Retirement may last 20, 25, or 30 years. The Social Security Administration’s 2025 Trustees data estimated period life expectancy at age 65 at 18.4 more years for men and 21.0 more years for women under intermediate assumptions (SSA life expectancy table). Many households plan for even longer, especially for married couples where one spouse may live well beyond the averages.
That means growth still matters. The key is deciding where volatility belongs.
Near-term income dollars may need more stability. Longer-term dollars may need growth to help protect purchasing power. A durable plan tries to respect both risks: the risk of early market losses and the risk of being too cautious for too long.
Planting nothing because of fear of drought is rarely a winning strategy. In retirement, avoiding all volatility can create its own long-term risks if purchasing power slowly erodes over time.
The takeaway
Sequence of returns risk matters because retirement is not just about earning returns. It is about drawing income from imperfect markets over many years.
A good plan cannot control market timing. But it can help organize cash flow, taxes, Social Security, reserves, and investments so one bad season does not automatically dictate the whole harvest.
If you want to review how your retirement income plan is organized, click the button below to schedule a time to chat.