Retirement investment risk
What If the Market Falls the Year You Retire? Understand Sequence-of-Returns Risk
A market decline is uncomfortable while accumulating. Once withdrawals begin, selling into a decline can make the timing of returns more important to the sustainability of a portfolio.
Quick answer: Sequence-of-returns risk is the risk that poor investment returns early in retirement, while you are withdrawing money, do more lasting damage than the same returns later. Withdrawals during a decline sell assets at low prices, which leaves less capital to recover. You cannot control the order of returns. You can decide in advance how spending, cash reserves and investments would respond.
Same returns, different order, different result
Hypothetical Two retirees each start with $1,000,000 and withdraw $50,000 at the start of each year. Both experience the same five annual returns of −20%, −10%, +5%, +15% and +20%, but in opposite order. The returns are invented for illustration, not a forecast, and ignore taxes, fees and inflation.
| Year | Retiree A return | Retiree A balance | Retiree B return | Retiree B balance |
|---|---|---|---|---|
| 1 | −20% | $760,000 | +20% | $1,140,000 |
| 2 | −10% | $639,000 | +15% | $1,253,500 |
| 3 | +5% | $618,450 | +5% | $1,263,675 |
| 4 | +15% | $653,718 | −10% | $1,092,308 |
| 5 | +20% | $724,461 | −20% | $833,846 |
Without withdrawals, both portfolios would end at the same $1,043,280, because multiplication does not depend on order. With withdrawals, Retiree A ends about $109,000 behind Retiree B, even though both experienced identical returns. The only difference is that Retiree A's losses came first, while money was being taken out.
Why the years around retirement matter most
Balances are often at their largest near retirement, so a percentage loss means the largest dollar loss. At the same time, withdrawals are just beginning, and the plan has to last for decades. That combination is sometimes called the “retirement red zone.” It is a reason to re-evaluate an accumulation portfolio before it becomes an income portfolio, not a reason to predict the market.
Planning levers that do not depend on prediction
| Lever | How it helps | Trade-off |
|---|---|---|
| Cash or short-term reserve for near-term spending | Less need to sell long-term investments during a decline | Cash may earn less and can lose purchasing power to inflation |
| Spending flexibility | Trimming discretionary spending after a bad year reduces forced selling | Requires a budget you can actually adjust |
| Allocation matched to withdrawals | Less volatility in the assets you will draw on soon | Lower expected long-term growth on that portion |
| Delaying Social Security | A larger lifetime income floor reduces later withdrawals | Larger withdrawals in the bridge years |
| Part-time work early in retirement | Smaller early withdrawals | Earnings test if claiming Social Security before full retirement age |
| Lifetime income sources (pension payment options, annuities) | Can cover part of essential spending without selling investments | Pension choices are often irrevocable. Annuities involve costs, surrender limits and reliance on the issuing insurer's claims-paying ability. Evaluate carefully. |
No lever eliminates risk. Every approach trades some growth potential, liquidity or flexibility for resilience. The goal is to choose the trade-offs on purpose.
Stress tests worth running before you retire
- A significant stock-market decline in your first retirement year.
- Several years of below-plan returns rather than one sharp drop.
- Higher inflation and higher healthcare costs at the same time.
- Retirement starting two years earlier than planned.
- A surviving spouse managing the same assets on one Social Security benefit.
For each test, write down what you would do: which account you would draw from, which expenses you would trim and when you would resume normal withdrawals. A written rule is easier to follow during a stressful market than a decision made in the moment.
Connect it to the rest of the plan
Sequence risk interacts with other decisions. Claiming Social Security earlier reduces early withdrawals but lowers lifetime income. See Social Security at 62 vs. 67. Withdrawing from different account types changes taxes and Marketplace costs. See healthcare before Medicare. The broader framework is in retirement income planning.
An example of a written spending rule
Some retirees decide ahead of time how spending will respond to markets, so the decision is not made under stress. Planners describe these as decision rules or “guardrails.” The version below is invented for illustration. It is not a recommendation, and any real rule should be tested against your own plan.
| If, at the annual review… | Then… |
|---|---|
| The portfolio fell during the prior year | Skip the inflation increase to withdrawals for the coming year, and draw from the cash reserve first. |
| The withdrawal rate rose well above the starting rate | Trim discretionary spending by a set percentage until the rate returns to range. |
| Investments recovered and the withdrawal rate fell below the starting rate | Refill the cash reserve, then resume normal increases. |
| Essential spending is at risk under any scenario | Revisit the plan: retirement date, Social Security timing, housing or part-time work. |
The value of a rule like this is clarity: everyone in the household knows in advance what happens after a bad year. The specific thresholds should come from your own projections.
Questions to ask about your own plan
- How many years of essential spending could I cover without selling stocks after a decline?
- Which expenses would I cut first, and by how much?
- Does my plan still work if the first three years are poor?
- How does my Social Security claiming age change my early withdrawals?
Frequently asked questions
What is sequence-of-returns risk in simple terms?
It is the risk that bad returns arrive early in retirement, while you are withdrawing money, and permanently shrink the portfolio more than the same returns would if they arrived later.
Does sequence risk matter if I am not withdrawing?
Much less. Without withdrawals or contributions, the order of returns does not change the ending balance. The risk comes from selling assets to fund spending during a decline.
Should I move everything to cash before retiring?
Not necessarily. Holding everything in cash reduces short-term volatility but exposes a long retirement to inflation and lower growth. Many plans instead size a reserve for near-term needs and keep longer-term money invested according to the household's risk tolerance and time horizon.
How long is the highest-risk period?
There is no official definition. Planners commonly focus on the years just before and after retirement, when balances are largest and withdrawals begin.
What to do next
- Use the 55–65 Retirement Opportunity Guide to plan the investment-risk transition as one of your 10 decisions.
- Take the Retirement Readiness Assessment to see where reserves and stress tests rank among your open questions.
- Schedule a conversation to run the stress tests against your own plan.
Sources
- SEC Investor.gov — Managing your retirement
- FINRA — Retirement accounts and planning
- SSA — Delayed retirement credits
All returns and balances on this page are hypothetical. Investing involves risk, including possible loss of principal. No strategy assures a profit or protects against loss in declining markets.
Next step
Find out whether the income plan depends too heavily on favorable markets.
Use the Retirement Readiness Assessment to identify gaps in liquidity, withdrawal planning, healthcare and contingency preparation.
Take the Readiness AssessmentPrepared by Strong Tower Advisors for general retirement education. Rule-based content is linked to primary public sources where practical and is reviewed periodically because tax, retirement-plan, Social Security, healthcare and Medicare rules can change.
About Strong Tower Advisors · Editorial and sourcing standards · Last reviewed October 2026