In retirement, timing matters more than you think

In retirement, the timing of market returns can matter more than the average return you earn. A market decline in your first years of retirement, while you are also withdrawing money, can permanently shrink your portfolio in a way that a later decline would not. This is called sequence of returns risk, and a sound plan is built to absorb it rather than hope it never happens.

Average returns hide a real risk

When you were saving for retirement, the order of your investment returns barely mattered. A rough year early on had decades to recover, and what counted was the long-term average. Once you retire and start drawing income, that changes. Now you are taking money out at the same time the market may be falling, and the sequence of those returns starts to matter as much as the average.

Two retirees can earn the exact same average return over thirty years and end up in very different places, simply because of when the good and bad years arrived. That is the part most retirement rules of thumb leave out.

Why early losses hit harder

A decline in your first few years of retirement does lasting damage because you are selling investments to fund your spending while prices are low. Those shares are gone, so they cannot rebound when the market recovers. The same decline ten years later, after your portfolio has had time to grow, leaves you with far more cushion. This is the heart of what advisors call sequence of returns risk.

What a durable plan looks like

You cannot control when a downturn arrives, but you can build a plan that does not depend on good timing. A few choices make a meaningful difference:

• Keeping a portion of your money in stable, accessible assets so you are not forced to sell stocks in a down market
• Setting a withdrawal strategy with room to adjust spending in weaker years
• Matching your investment mix to when you will actually need each dollar
• Stress testing your plan against poor early returns, not just average ones

The goal is not to predict the market. It is to make sure an unlucky start does not change the rest of your retirement.

Planning for the markets you cannot choose

Retirement planning works best when it assumes the markets will not always cooperate. By preparing for an early downturn ahead of time, you give yourself the freedom to stay the course when one arrives, instead of reacting under pressure. If you are within a few years of retirement, this is one of the most valuable conversations you can have with a fiduciary advisor.

Frequently asked questions

What is sequence of returns risk?

Sequence of returns risk is the danger that poor investment returns early in retirement, combined with ongoing withdrawals, permanently reduce how long your savings last. The same returns later in retirement would do far less harm because your portfolio has had time to grow.

How can I protect against a market drop early in retirement?

Common approaches include holding some money in stable assets so you are not forced to sell stocks at a loss, keeping your withdrawal plan flexible, and stress testing your plan against a poor start rather than only average returns.