While you are saving, the order of your investment returns tends to matter less. A bad year early in your career can even work in your favor: you are still contributing, and you buy more shares at lower prices.
Retirement inverts that. Once you are withdrawing rather than contributing, a bad stretch early in retirement can do lasting damage, because every dollar you take out during the decline is a dollar that is not there to participate in any recovery. Even if the market recovers, the shares you sold to fund withdrawals do not.
Financial planners call this sequence-of-returns risk. It is not a theoretical concern, and in our view it is one of the strongest arguments for building a retirement income strategy rather than relying on portfolio size alone.
The same average, two different outcomes
Picture two people who retire with identical portfolios and withdraw the same amount each year, adjusted for inflation. Over their first decade, both experience the exact same set of annual returns — the same average, the same volatility, the same numbers. The only difference is the order.
The first retiree gets the strong years early and the weak years later. Their portfolio grows before withdrawals have taken much of a bite, and the losses arrive when the balance has already been built up. The second retiree gets the weak years first. Their withdrawals come out of a shrinking balance, locking in losses that the later strong years have to work much harder to repair.
Run that comparison for thirty years and, in some scenarios, the second retiree can run out of money while the first ends with more than they started with. Same average return. Same spending. Different order.
Average returns are what you report. Sequence is what you live through.
Why the standard advice is not enough
The familiar guidance — hold a diversified portfolio, do not panic, stay the course — is sound, but often not sufficient on its own. Staying the course is a behavioral instruction. Sequence risk is a cash flow problem. You can be perfectly disciplined and still be forced to sell equities into a downturn because rent, insurance, and groceries do not pause during a bear market.
The response is structural: a plan designed to reduce the need to sell depressed assets, built before you need it.
Four practical defenses
1. A real cash reserve, sized in years, not months. Working households are usually told to keep three to six months of expenses. Many retirees may want to think in terms of one to three years of the portion of spending that the portfolio has to cover. That reserve is not there to earn a return; it is there to help reduce the chance that a bad eighteen months forces a sale at a low price.
2. Know which dollars you spend first. Withdrawal sequencing across taxable, tax-deferred, and Roth accounts affects both your tax bill and your flexibility. Having a stated order — and knowing which account you would tap in a down year specifically — turns a stressful decision into a rule you already agreed to.
3. Build in flexibility on the spending side. Not all retirement spending is fixed. Property taxes and insurance are. A kitchen remodel, a large trip, or a new vehicle are not. Identifying in advance which expenses can be delayed by a year gives you a lever that does not require selling anything.
4. Reconsider the glide path around the retirement date. The years immediately before and after you stop working are often when sequence risk is highest, because the balance tends to be near its largest and withdrawals are beginning. Depending on their circumstances, some retirees may benefit from reducing equity exposure into that window and allowing it to drift back up afterward, rather than holding a static allocation straight through it.
What this looks like in practice
When we build a retirement income plan, we start with the spending number and work backwards. How much of it is covered by Social Security, a pension, or other guaranteed income? What is left is the portfolio's job, and that is the figure the cash reserve and withdrawal sequence get sized against.
Then we stress the plan deliberately. What happens if the first three years look like 2000 through 2002? What happens if they look like 2008? If the plan only works when returns are average or better, it is not a plan — it is a hope with a spreadsheet attached.
The takeaway
You cannot control whether your retirement begins in a good decade or a bad one. You can plan for how a bad start would be handled, so it is less likely to force you to sell. In our view, that is decided far more by structure put in place beforehand than by decisions made in the middle of a decline.
If you are within five years of retiring on either side, it is worth having someone stress test the first decade specifically. In our experience, it is a part of the plan that carries significant risk and often gets too little attention.