Two retirees with the same starting balance, the same average return, and the same withdrawal rate can end up in very different places—one comfortable for life, one out of money in their late seventies. The difference is rarely strategy. It is timing. The order in which good and bad years arrive matters enormously once you stop contributing and start withdrawing, and the danger has a name: sequence of returns risk.
Why the Order of Returns Matters
While you are still working, the sequence of market returns is largely irrelevant. A 30% drop in your fifth year of saving feels painful, but you keep contributing, you buy more shares at lower prices, and over decades the average return is what shapes the outcome.
Retirement flips that math. When you are pulling cash out of a falling portfolio, every withdrawal locks in losses and shrinks the base that needs to recover. Research by retirement economist Wade Pfau estimates that roughly 77% of a retiree's final portfolio outcome is explained by the returns of the first 10 years alone. A bad opening decade is difficult to recover from, even if the next 20 years are strong.
Charles Schwab and U.S. Bank both highlight the same mechanic in their planning literature: when you sell investments to raise a fixed amount of cash during a downturn, you have to sell more shares to hit that number. That accelerates the drawdown and leaves fewer assets to participate in the eventual recovery.
A Simple Illustration
Consider two retirees who each start with $1 million, withdraw $50,000 a year (adjusted for inflation), and earn the same average return of 6% over 25 years. The only difference is the order of the returns.
- Retiree A faces a sharp downturn in years one through three, then strong gains.
- Retiree B enjoys strong gains first and the downturn arrives 15 years in.
Despite identical averages, Retiree A's portfolio can run out a decade earlier than Retiree B's. Same math, different timing, very different retirement.
Mitigation Strategies Worth Knowing
Sequence risk cannot be eliminated, but it can be managed. Several widely cited approaches stand out.
- Hold a cash reserve. A common recommendation is roughly one year of living expenses in cash and another two to four years in high-quality short-term bonds. The point is to avoid selling stocks during a downturn for spending needs.
- Use a bucket strategy. Bucket one (years 1–5) sits in liquid, low-volatility assets. Bucket two (years 6–15) holds bonds and conservative income investments. Bucket three (years 15+) stays in equities for long-term growth. Down years are funded from the first two buckets while equities recover.
- Stay flexible with withdrawals. Reducing withdrawals modestly in bear markets—pulling 3.5% instead of 4%, for example—can meaningfully extend a portfolio's life. Increases in strong years can offset the discipline.
- Diversify beyond equities. Bonds, dividend-paying stocks, and a measured allocation to assets with low correlation to equities (such as gold) can soften the early-retirement drawdown when stocks fall.
- Consider a "retirement red zone" glide path. The five years before and the five years after retirement are when sequence risk is highest. Many planners gradually reduce equity exposure entering this window and rebuild it once the portfolio is past the danger zone.
Practical Takeaways for 2026 Retirees
With the S&P 500 still trading near record territory and gold near all-time highs, new retirees in 2026 face a familiar question: what happens if a correction lands in year one or year two? The honest answer is that nobody knows, which is exactly why the planning frameworks above exist.
- Build the cash and short-bond reserve before you stop earning, not after a market drop.
- Write down your withdrawal rule so you don't improvise during a sell-off.
- Rebalance on a schedule rather than on impulse.
- Coordinate Roth conversions, Social Security timing, and pension elections so you have flexibility about which account you draw from in any given year.
The Bottom Line
Average returns matter, but for retirees the order of those returns matters more. A portfolio that survives a rough first decade is far more likely to last 30 years than one that does not. Sequence of returns risk is not a reason to avoid the markets in retirement—it is a reason to plan for the years that will determine the outcome. As always, retirees should coordinate withdrawal and asset-location decisions with a qualified financial advisor.
Sources: Charles Schwab, U.S. Bank, Kiplinger, Retirement Researcher (Wade Pfau), Thrivent, American Century