Sequence of Returns Risk: Why Early Retirement Years Matter

Sequence of returns risk explained: why the order of market returns matters once you withdraw, why early years weigh most, and what each fix costs.

Sequence of returns risk is the chance that poor market results arrive early in your retirement, while you are also taking withdrawals. The order matters because money you withdraw during a downturn is no longer invested when markets recover, so the same average results can leave you with a different outcome depending on when the good and bad years land.

I'm Ryan Langan, CFP®, and I plan retirement income with pre-retirees and retirees who are moving from saving to spending. This is often the worry underneath the question "Will I be okay?" I explain the idea in words only, with no made-up portfolio or return figures, because nobody can forecast markets and a hypothetical can start to look like a forecast. Here is why the early years carry extra weight, what people commonly do about it, and what each approach costs you.

The short version:

• What it is: Poor returns early in retirement, while you are withdrawing, can matter more than the same returns arriving later.
• Why the early years: Your portfolio is at its largest and has the most withdrawals still ahead of it.
• What people do about it: Five common approaches, compared in a table below. Each one has a cost.
• What none of them does: Remove the risk. Investing involves risk, including loss of principal.

What is sequence of returns risk in retirement?

Think about two kinds of years in your financial life. While you are working and saving, a market drop is uncomfortable, but you are adding money, so you can buy while prices are lower. Once you are retired and taking withdrawals, the situation flips. You are selling to cover living costs, and you may be selling after a drop.

That is the heart of it. When you sell investments after they have fallen, you sell more of them to raise the same spending money, and those shares are no longer there to take part in a recovery. Schwab (2026) describes sequence-of-returns risk as the way the order and timing of poor returns can change how long retirement savings last. Vanguard's retirement income research points to the same mechanism: necessary withdrawals reduce the assets available to benefit from a later recovery.

You may also see it called sequence risk or sequence-of-returns risk. Whatever the label, it is a timing problem, not a prediction. It does not say markets will fall. It says that if they do fall early, and you are withdrawing, the damage can be larger than the same drop would cause later.

Why do the first years of retirement matter most?

The early years matter because that is when your portfolio is largest and has the longest stretch of withdrawals ahead of it. A loss then affects the most dollars, and every withdrawal after it comes from a smaller base. A loss late in retirement affects a smaller balance with fewer years left to fund.

Researchers have studied this using historical data. Kitces Research (2026) reported that returns in roughly the first 10 to 15 years of retirement carried much of the weight in whether a withdrawal plan held up. Morningstar (2021) notes the issue is most relevant in the first few years before and after retirement, and a 2026 Morningstar interview with retirement specialists Jamie Hopkins and Bonnie Treichel discusses managing it across the first five to ten years.

Two honest limits apply. First, that research looks at the past, and your retirement will not repeat it. Second, early years are not the only risk. Morningstar's research (2025) also cautions that losses in later years can do real damage depending on how deep and long they are. Early years carry extra weight, but they are not the whole story.

How can you reduce sequence of returns risk?

Common ways to reduce sequence of returns risk include flexible spending rules, a cash reserve, a lower starting withdrawal rate, a steadier investment mix near retirement, and some flexibility on timing or income. No approach removes the risk, and each gives something up, so the table shows the main trade-off beside each one.

• Flexible spending rules (guardrails). You agree in advance to trim spending after a sharp drop and let it rise after strong years. Trimming is harder when much of your budget is fixed, such as housing and healthcare. I compare this with other rules in my post on retirement withdrawal strategies.
• A cash reserve (the bucket approach). You set aside a stretch of planned withdrawals so you can spend from it instead of selling after a drop. Vanguard notes holding too much in low-yielding cash can limit long-term growth, and in a long downturn the reserve runs out and needs refilling.
• A lower starting withdrawal rate. Taking less at the start leaves more of the portfolio invested through a rough stretch. The cost is that you may spend less in the early years than you needed to, and you may not know that was too cautious until later. I wrote about the limits of a fixed rate in the real problem with the 4% rule.
• A steadier mix near the retirement date. Holding less in investments that swing widely can soften an early drop. You give up some growth that a long retirement may call for, and steadier investments can still lose value.
• Flexible timing or income. Working a little longer, or earning something part-time early on, means fewer withdrawals while markets are down. Kitces Research (2026) looks at a flexible retirement date window. It is a life choice, not just a financial one, and your health, job and energy may not cooperate.

Investing involves risk, including loss of principal, and none of these steps guarantees a result.

Can you combine these approaches?

Yes, and many plans do. A plan might use a spending rule to set the amount, a cash reserve to decide where the money comes from, and a steadier mix near retirement. The trade-off is more moving parts to explain and maintain. A simple plan you will follow in a bad year can serve you better than a clever one you will abandon.

If you want to start with the spending side, read how much you can safely spend in retirement.

What does this mean if you are a few years from retiring?

Sequence of returns risk matters before you retire, because the years just before retirement are when you decide how your savings are invested, when withdrawals begin and how flexible your spending can be. If you are one to five years from retirement, those choices land right before the stretch when the risk carries the most weight.

You cannot plan around it by guessing the market, though. Trying to time your retirement date to a market high is still a guess, and a rule you can follow in any market tends to serve you better than a prediction. I would start with a few honest questions, and notice that each answer pulls in a different direction.

• How would you react if your portfolio fell sharply in your first year or two of retirement? If you would be tempted to sell, a visible cash cushion may help, at the cost of lower expected growth on that money.
• How fixed is your spending? If most of it is fixed, a rule that asks you to cut may feel harder, but a plan that never adjusts may leave you with fewer options in a rough stretch.
• What other income covers your costs? Social Security, a pension or part-time income reduce how much your savings have to supply, which can reduce the number of dollars exposed to a bad early sequence.
• Could you delay a withdrawal, or a retirement date, by a year or two if you had to? That flexibility is worth something, and it is also a decision you may not want to make under pressure.

In my own planning, I write down a starting withdrawal rate with upper and lower guardrails, and I hold a cushion of lower-volatility assets to spend from in a downturn. I explain how in my retirement guide. The point is to make the hard decisions early and calmly, so you are not making them in the middle of a market scare.

Where does a flat-fee planner fit?

Sequence of returns risk is not something you can hand off. What a planner can do is build the rules with you, test them against your taxes, Social Security timing, healthcare costs and any pension, and revisit them as your life and the markets change. That is the work I do.

I charge a flat fee instead of a percentage of your portfolio, so my fee does not rise or fall with your account balance. You can see how that works on the fees page. The trade-off is that a flat fee pays for planning, not for market results, and it does not make any of these approaches safer. If you are comfortable keeping one simple rule on your own, you may not need ongoing help. If you would rather have someone build the plan and keep it current, see our services.

Frequently asked questions

What is sequence of returns risk in simple terms?

It is the risk that poor investment results come early in retirement, when you are also taking withdrawals. Selling after a drop leaves fewer investments to recover, so the order of good and bad years can change how long your savings last, even if the average result looks the same. It describes a possibility, not a forecast.

How long does sequence of returns risk last?

There is no exact cutoff. Researchers point to the years just before and after you retire, and Kitces Research (2026) looked at roughly the first 10 to 15 years of retirement in historical data. The risk tends to fade as the years with the most withdrawals ahead of you pass, but later losses can still matter. Past data does not predict your own retirement.

Does sequence of returns risk matter before you retire?

Yes, because the years just before retirement are when you choose how your savings are invested, when withdrawals begin and how flexible your spending can be. Morningstar (2021) notes the issue is most relevant in the first few years before and after retirement. While you are still adding to your savings, a downturn can feel different, since you are buying at lower prices, but it still matters if it lands just before you start withdrawing.

How do you protect against sequence of returns risk?

You cannot eliminate it, but you can reduce how exposed you are. Common approaches include flexible spending rules such as guardrails, a cash reserve, a lower starting withdrawal rate, a steadier investment mix near retirement, and some flexibility on timing or income. Each has a cost, such as less spending, lower growth or more upkeep, so the right mix depends on your situation.

Where do you go from here?

If you would like to see how your own income, taxes and healthcare fit together before the first years of retirement arrive, you can book a Retirement Strategy Session.

Reviewed October 29, 2026, by Ryan Langan, CFP®. This post is educational and is not personalized investment, tax or legal advice. The research linked above tests ideas against historical data or simulations, which do not predict your results. Investing involves risk, including the potential loss of principal.