Retirement Income
Understanding Sequence-of-Returns Risk
Two retirees can invest in exactly the same things, earn the same average return over 25 years, and still end up in completely different places. The difference is the order the returns arrive in — and it matters most right when you retire.
Why order matters once you're withdrawing
While you're saving, a bad year just means buying in at lower prices — annoying, not fatal. Once you're retired and withdrawing, a bad year is different: you're pulling money out of a shrunken balance, which means selling more shares at low prices to raise the same dollars.
If strong years come first, the portfolio builds a cushion before the bad years arrive. If bad years come first — say, in the first five years of retirement — the withdrawals during the decline can do damage the later good years never fully repair. Same average return, very different ending balances.
A simple illustration
Picture two retirees, each starting with the same balance and withdrawing the same amount each year. Retiree A's first decade includes a deep market drop early on; Retiree B's first decade is smooth and the drop comes in year twelve. Over the full 25 years their average annual return is identical. But A's account is materially smaller by the end — in a bad version of the sequence, it can be exhausted decades early.
Nothing about A's investments was wrong. The timing was wrong. That's sequence-of-returns risk: it isn't a market risk you can diversify away, because it's about your specific timeline.
What actually reduces the risk
- An income floor — covering essential expenses from sources that don't depend on the market, so withdrawals can flex in down years.
- A cash cushion — a year or two of planned withdrawals in cash, so a down market never forces a sale.
- Flexible withdrawals — trimming spending after a bad year, even modestly, changes the math more than most people expect.
- Not over-withdrawing early — the first-decade withdrawal rate matters far more than the average one.
Where this fits in planning
We factor your retirement accounts and other investments into your income plan — how much they can reasonably support, and in what order to draw on them — but we don't manage them; that stays with your investment professional. Our part is making sure the plan around those accounts holds up when the bad years arrive on their own schedule.
A note before you go
This article is general education, not advice about your specific situation — your numbers, health, and family will change the answer. Talk with our team before making decisions.
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