With the S&P 500 down roughly 4% year-to-date and ongoing market uncertainty, retirees and near-retirees face a challenge that younger investors don't: sequence of returns risk. Understanding this concept could be the difference between a comfortable retirement and running out of money.
What Is Sequence of Returns Risk?
During your working years, market volatility is mostly a test of patience. Your regular contributions buy more shares when prices drop, and you have time to recover from downturns. But retirement introduces a fundamentally different dynamic.
Once you begin withdrawals, the sequence of returns matters just as much—if not more—than the returns themselves. A down market early in retirement doesn't just test your patience; it can quietly reshape the longevity of your entire portfolio.
Here's why: when you withdraw money during a market decline, you're selling investments at lower prices. Those shares are gone permanently and won't participate in the eventual recovery. This creates a compounding effect that can deplete savings faster than expected, even if long-term average returns remain normal.
Why This Matters Now
Current market conditions highlight this risk. With major indexes showing losses amid geopolitical tensions, inflation concerns, and economic uncertainty, retirees withdrawing funds now are selling into weakness. Those who retired in early 2026 with aggressive portfolios may already be experiencing this firsthand.
"The best way to handle sequence of returns risk is to put a plan in place before someone retires," said CFP André Small, founder of A Small Investment in Houston. "I typically encourage clients to start planning for sequence risk at least three to five years before retirement."
Seven Strategies to Protect Yourself
1. Build a Cash Cushion
Maintain one to two years of living expenses in cash or money market funds. If markets drop, you can pay bills from this reserve instead of selling investments at a loss, giving your portfolio time to recover.
2. Diversify Beyond Stocks
Investment-grade bonds and dividend-paying stocks can provide regular income without requiring you to sell principal during downturns. Different asset classes don't move in lockstep, helping smooth out volatility.
3. Review Your Withdrawal Strategy
Common approaches include the 4% rule with inflation adjustments, the "bucket" strategy that segments money by time horizon, or living only on dividends and interest. Each has trade-offs worth discussing with a financial advisor.
4. Consider Roth Conversions During Downturns
Market pullbacks can be opportunities. Converting traditional IRA funds to Roth accounts when prices are depressed means paying taxes on lower values. Once in the Roth, those investments grow and can be withdrawn tax-free.
5. Delay RMDs If Possible
If you're due to start required minimum distributions in 2026 and markets remain down, consider waiting until April 1, 2027 (the latest allowed for your first RMD). This gives markets more time to potentially recover.
6. Consider Partial Annuitization
Converting a portion of savings to an annuity guarantees lifetime income regardless of market conditions. This provides a floor of stable income to cover essential expenses.
7. Avoid Panic Selling
Every major market decline from 1987 through 2022 has eventually reversed. Staying invested through volatility has historically outperformed portfolios that missed the market's top-performing days by trying to time exits and entries.
The Bottom Line
Sequence of returns risk is one of the most underappreciated threats to retirement security. The good news is that with proper planning—ideally beginning three to five years before retirement—you can significantly reduce your vulnerability. Start by assessing your current withdrawal rate, building cash reserves, and ensuring your portfolio allocation matches your actual need for stability versus growth.
Sources: CNBC, Charles Schwab, Fidelity, Morgan Stanley, John Hancock