Sequence of Returns Risk: Safeguard Your Retirement Journey

Safeguard Your Retirement Journey

Retirement is a milestone you’ve worked toward for years—envisioning a time when you can travel, spend time with loved ones, or simply relax without the weight of a daily grind. Your savings are the foundation of that dream, built through decades of discipline. But what happens if the market takes a sharp turn just as you’re ready to step into this new chapter? That’s where sequence of returns risk comes in—a subtle but powerful factor that could reshape your retirement plans. Understanding it and knowing how to protect your savings can make all the difference in ensuring your vision for retirement stays within reach.

What Is Sequence of Returns Risk?

Think of your retirement portfolio as the engine powering your future. Every withdrawal you make to cover expenses, whether for a dream vacation or daily bills, draws from that engine. If the market delivers strong returns early in retirement, your portfolio can keep humming along, supporting your plans. But if the market dips sharply in those early years, each withdrawal pulls from a smaller pool, making it harder for your savings to recover when markets rebound. That’s sequence of returns risk: the impact of when your investment returns happen, not just their average over time.

For example, imagine a $1 million portfolio with plans to withdraw $40,000 a year, adjusted for inflation. If the first two years bring 8% returns, your savings could grow to around $1.16 million after withdrawals. But if those first years deliver -10% returns, your portfolio might shrink to $810,000 or less, leaving you with less fuel for the long haul. Research shows this risk is most critical in the “fragile decade”. The years just before and after retirement when your savings need to stretch for 20 or 30+ years given today’s longer life expectancies. Use our calculator to see the potential impact for your portfolio.

Why This Matters for Your Retirement

You’ve likely spent years building a portfolio to support your retirement goals. Whether that’s exploring new places, supporting your family, or pursuing passions you’ve put on hold. But even a well-diversified portfolio can feel the sting of sequence of returns risk. Early market downturns mean selling investments at lower prices, which can erode your savings faster than expected. Over time, this can limit your ability to enjoy the retirement you’ve envisioned, especially as you plan for a future that might span decades.

The difference can be stark. Consider two retirees with identical $1 million portfolios and withdrawal plans. One enjoys early market gains, leaving their savings robust. The other faces early losses, and even if their average returns match over time, their portfolio could dwindle significantly faster. This isn’t about average returns, it’s about the order of those returns and how they align with your withdrawals.

Strategies to Protect Your Financial Future

The good news? You have the power to protect your retirement savings from sequence of returns risk. By planning thoughtfully, you can build a strategy that keeps your portfolio resilient, no matter what the market does. Here are practical steps to consider:

1. Spread Your Investments Wisely
   Diversifying across stocks, bonds, real estate, and other assets helps cushion the impact of a downturn in any one area. It’s like building a sturdy foundation for your retirement home, balanced and ready for any storm.

2. Shift Your Portfolio Over Time
   As retirement approaches, gradually moving toward a more conservative mix can reduce exposure to market swings. A “glide path” strategy eases this transition, keeping your savings more steady.

3. Secure a Steady Income Stream
   Annuities, such as those with guaranteed lifetime withdrawal benefits, can provide reliable income to cover essentials, unaffected by market ups and downs. This ensures your core needs are met, giving your portfolio room to grow.

4. Keep a Cash Reserve
   Holding 1-2 years of living expenses in a separate, accessible account means you won’t need to sell investments during a market dip. It’s a buffer that keeps your plans on track.

5. Stay Flexible with Spending
   If markets falter, trimming non-essential expenses can help your savings stretch further, preserving your portfolio for brighter days.

6. Consider Timing
   Working a bit longer, if possible, gives your portfolio more time to grow and recover from any market dips, shortening the years you’ll rely on withdrawals.

7. Partner with a Trusted Advisor
   A financial advisor can tailor these strategies to your unique goals, regularly reviewing your plan to adapt to market changes or shifts in your priorities.

A Real-Life Perspective

Picture two retirees starting with $1 million each, both planning to withdraw $40,000 annually. One faces early market losses, dropping their portfolio to $810,000 after two years. The other enjoys early gains, growing their savings to $1.16 million. Even if their long-term returns average out, the first retiree’s savings are at risk of running low sooner. This shows how critical early planning is to keeping your retirement goals within reach.

Take Charge of Your Retirement Today

Your retirement is about more than numbers. It’s about the life you’ve dreamed of, built on years of hard work. Sequence of returns risk is a challenge, but it’s one you can navigate with the right strategies. By understanding this risk and taking proactive steps, you can protect your savings and keep your plans on track, no matter what the market brings.

Click here to jump over to our Sequence of Returns calculator so you can see the impact for yourself.