Sequence of Returns: Why Timing Matters More Than You Think

Two retirees can have identical average returns but wildly different outcomes. A bad market in your first years of retirement can permanently damage your portfolio. Here's what you need to know.

The Order Matters

During the accumulation phase, the order of returns doesn't matter much. Whether you get good returns early or late, your final balance is roughly the same if the average is the same.

But once you start withdrawing, everything changes. Selling shares in a down market locks in losses and leaves fewer shares to participate in the recovery.

Same average return. A $240,000 difference. That's sequence risk.

The Retirement Red Zone

Financial planners call the five years before and after retirement the "retirement red zone." This is when sequence risk is highest because:

• Your portfolio is at or near its maximum size
• Losses represent the most dollars you'll ever lose in absolute terms
• You have less time to recover
• You may be starting withdrawals

A 30% crash when you have $100,000 costs you $30,000. The same crash when you have $1,000,000 costs you $300,000. And if you're withdrawing during that crash...

Strategies to Mitigate Sequence Risk

1. The Bond Tent

Increase your bond allocation as you approach retirement, then gradually reduce it over time. This creates a "tent" shape in your asset allocation:

• Age 50: 70% stocks / 30% bonds
• Age 65: 50% stocks / 50% bonds (peak of tent)
• Age 80: 60% stocks / 40% bonds

The higher bond allocation at retirement protects against early bad returns. As you age and the sequence risk period passes, you can afford more stock exposure again.

2. Cash Buffer / Bucket Strategy

Keep 2-3 years of expenses in cash or short-term bonds. When markets crash, draw from the cash bucket instead of selling stocks at low prices. Refill the bucket when markets recover.

3. Flexible Withdrawals

Instead of a fixed 4% withdrawal, adjust based on market conditions:

• Good year? Take a little more.
• Bad year? Tighten the belt and withdraw less.

Research suggests flexible withdrawal strategies significantly improve portfolio survival rates.

4. Part-Time Work in Early Retirement

Even modest income in the first few retirement years reduces sequence risk dramatically. A part"../../../coming-soon/blog/us"-time job bringing in $20,000/year means $20,000 less you need to withdraw from your portfolio.

Social Security as Sequence Risk Insurance

Delaying Social Security until 70 isn't just about the 8% per year increase. It's also sequence risk protection.

If you delay Social Security and use your portfolio from 62-70, you're taking withdrawal risk during those years. But once the larger Social Security check kicks in at 70, your required portfolio withdrawal drops significantly—just when sequence risk typically peaks.

Alternatively, some argue for claiming Social Security early if you can let your portfolio grow untouched for a few more years.

How Talk Through Wealth Helps

Stress-test your retirement plan against sequence risk:

• Model your portfolio through historical bad periods (2000-2002, 2008-2009)
• See how different asset allocations affect survival rates
• Compare fixed vs flexible withdrawal strategies
• Understand the impact of Social Security timing on sequence risk
• Test your specific plan against a range of scenarios