Sequence of Returns Risk

Sequence of returns risk is the retirement danger nobody talks about—but it can destroy your nest egg even if average returns are great.

The Problem: Returns matter less than WHEN they happen. Two retirees with identical average returns can have vastly different outcomes based on the order of those returns.

Example: Retiree A: Retires into a bull market

• Years 1-5: +10% returns
• Years 6-10: -5% returns
• Outcome: Portfolio thrives, withdrawals sustainable

Retiree B: Retires into a bear market

• Years 1-5: -5% returns
• Years 6-10: +10% returns
• Outcome: Portfolio depleted, money runs out at age 80

Both had the same average return (2.5%), but Retiree B is broke.

Why Early Years Matter Most: You're withdrawing money during down markets, selling low and permanently reducing your principal. Those shares are gone and can't participate in the recovery.

Real-World Example (2000-2002 Crash): Retiree with $1M, withdrawing $40,000/year (4%):

• If retired in 1999 (before crash): Portfolio survives
• If retired in 2000 (during crash): Portfolio fails by age 75

Mitigation Strategies:

1. Lower Withdrawal Rate: Use 3-3.5% instead of 4% for buffer

2. Bond Tent: Increase bond allocation 5 years before retirement, then gradually shift back to stocks

3. Bucket Strategy:

• Bucket 1: 2 years expenses in cash
• Bucket 2: 3-5 years in bonds
• Bucket 3: Rest in stocks (long-term growth)

4. Dynamic Spending: Cut spending 10-20% during market crashes

5. Delay Retirement: Work one more year if market crashes right before planned retirement

The 2020 Example: Anyone retiring in March 2020 (COVID crash) faced this risk. Those who delayed by 6 months had a much better outcome.