03 Sep Sequence of Returns Risk: What Retirees Need to Know

What Is Sequence of Returns Risk? Why a Market Drop Early in Retirement Can Matter So Much

Imagine two people retiring on the same day.

They each have the same amount of money invested.

They withdraw the same amount for retirement income.

Over time, their investments experience the same set of annual returns.

Yet one retiree may finish with considerably more money than the other.

How?

The returns happened in a different order.

This is known as sequence of returns risk, and it can become particularly important when you transition from saving for retirement to withdrawing money from your portfolio.

During your working years, a market decline may be uncomfortable, but your paycheck may allow you to continue paying your expenses without selling investments.

Retirement can change that equation.

Now your portfolio may have two jobs:

• Provide income for today’s expenses; and
• Continue growing to help fund potentially decades of retirement.

When withdrawals and declining markets occur at the same time, the order of your investment returns can become an important part of your retirement outcome.

You can’t control the order of market returns. You can plan for how you’ll respond to them.

What Is Sequence of Returns Risk?

Sequence of returns risk is the risk that poor investment returns occurring early in retirement, while you’re withdrawing money from your portfolio, may have a greater negative effect on your long-term retirement assets than the same poor returns occurring later.

The key isn’t simply that investments declined.

That’s ordinary market risk.

The additional challenge comes from withdrawing money while the portfolio is down.

When investments decline and shares must also be sold to provide retirement income, fewer assets remain invested to participate in a potential market recovery.

That’s why the average return of a portfolio doesn’t necessarily tell the entire retirement story.

How Does Sequence of Returns Risk Work? A Simple Example

Let’s look at two hypothetical retirees.

Both begin retirement with:

• $1,000,000 invested;
• $50,000 withdrawn at the end of each year; and
• The exact same six annual investment returns.

There is only one difference:

The returns occur in reverse order.

Retiree A: The Market Drops Early

Year	Annual Return	End-of-Year Withdrawal	Approx. Ending Balance
Start	—	—	$1,000,000
1	-20%	$50,000	$750,000
2	-10%	$50,000	$625,000
3	+5%	$50,000	$606,250
4	+10%	$50,000	$616,875
5	+15%	$50,000	$659,406
6	+20%	$50,000	$741,288

Retiree B: The Strong Returns Come First

Year	Annual Return	End-of-Year Withdrawal	Approx. Ending Balance
Start	—	—	$1,000,000
1	+20%	$50,000	$1,150,000
2	+15%	$50,000	$1,272,500
3	+10%	$50,000	$1,349,750
4	+5%	$50,000	$1,367,238
5	-10%	$50,000	$1,180,514
6	-20%	$50,000	$894,411

This hypothetical example is for illustrative purposes only. It assumes annual returns are applied before a $50,000 end-of-year withdrawal and does not include taxes, fees, inflation, required distributions, or other real-world considerations.

Look at the difference.

Both retirees:

• Started with $1 million;
• Withdrew a total of $300,000;
• Experienced the same six annual investment returns; and
• Had the same simple average annual return of approximately 3.3%.

But after six years, Retiree A has approximately $741,000, while Retiree B has approximately $894,000.

That’s a difference of roughly $153,000 created by the order in which the returns occurred.

Same starting portfolio. Same withdrawals. Same returns. Different sequence. Different outcome.

Why Doesn’t the Order of Returns Matter as Much Before Retirement?

Here’s what makes sequence of returns risk counterintuitive.

If neither hypothetical investor were taking withdrawals, reversing the order of those same investment returns would produce the same ending value, assuming everything else remained equal.

That’s because multiplication doesn’t care about the order.

But withdrawals change the equation.

During your accumulation years, you may still have employment income covering your lifestyle. You may also be contributing money to retirement accounts rather than withdrawing from them.

That can give a declining portfolio time to participate in a potential recovery without simultaneously being reduced by retirement withdrawals.

Once retirement begins, however, you may need the portfolio to produce income regardless of what markets are doing.

Retirement changes the math of a market downturn because you’re no longer only investing—you may also be withdrawing.

Why Can the First Years of Retirement Matter So Much?

The first several years of retirement can be particularly important because your portfolio may still need to support many years—or potentially decades—of future spending.

Suppose you retire and immediately experience a significant market decline.

If you need to continue selling investments to pay for living expenses, you’re withdrawing money from an already reduced portfolio.

Even if markets eventually recover, fewer dollars may remain invested to participate in that recovery.

A downturn later in retirement can still be significant.

But an early downturn may have more time to influence the future trajectory of your portfolio.

This is why retirement planning shouldn’t focus only on:

“What average return should I assume?”

It should also consider:

“What happens if the first few years don’t look anything like the average?”

What If the Market Drops the Year You Retire?

Imagine you’ve spent years preparing to retire.

You leave work.

Your paycheck stops.

And six months later, the market falls significantly.

It’s understandable to wonder whether you’ve made a terrible mistake.

But a market downturn doesn’t automatically mean your retirement plan has failed.

Instead, it may be time to revisit the assumptions and resources already built into your plan.

Questions to consider may include:

• How much of your upcoming spending needs to come from investments?
• Do you have cash or other relatively short-term resources available for near-term expenses?
• Which investments would need to be sold to fund withdrawals?
• Are any planned expenses flexible?
• Are there discretionary expenses that could temporarily be reduced?
• Do you have pension, Social Security, or other income sources?
• Has the downturn materially changed your longer-term retirement projections?
• Does your current investment allocation still match your spending needs and time horizon?

The answer shouldn’t automatically be:

“Sell everything.”

Nor should it automatically be:

“Ignore it and hope the market comes back.”

The appropriate response depends on the retirement plan.

A retirement plan shouldn’t depend on the market cooperating during your first few years of retirement.

Is Sequence of Returns Risk the Same as Market Risk?

No. The two concepts are related, but they aren’t identical.

Market risk is the possibility that an investment or portfolio loses value.

Sequence of returns risk involves the interaction between investment returns and withdrawals from the portfolio.

Consider a retiree whose portfolio declines 20% but who doesn’t need to sell any investments during that period.

That person has experienced market risk.

Now consider another retiree whose portfolio falls by the same percentage but who also needs to sell investments to fund living expenses.

That retiree faces the additional challenge that some of the assets sold during the downturn are no longer available to participate in a potential recovery.

That distinction matters because it changes how we think about managing the risk.

Should You Move Your Retirement Portfolio to Cash to Avoid Sequence Risk?

Sequence of returns risk can make the idea of avoiding the stock market entirely sound appealing.

If market declines are the problem, why not simply move everything to cash before retirement?

Because avoiding one risk can introduce others.

A retirement could potentially last 20, 30, or more years.

Over that period, a retiree may need to consider:

• Inflation;
• Loss of purchasing power;
• Longevity;
• Healthcare expenses;
• Long-term spending needs; and
• The need for some assets to potentially continue growing.

Holding more cash may reduce short-term market volatility, but cash also has its own risks and trade-offs.

The goal isn’t necessarily to eliminate market volatility.

The goal may be to reduce the likelihood that market volatility forces you to sell long-term investments at an unfavorable time.

Retirement Isn’t One Investment Time Horizon

One of the most useful ways to think about retirement assets is that every dollar doesn’t necessarily have the same job.

Money you expect to spend next month has a very different time horizon from money you may not need for another 15 or 20 years.

That can lead to different planning considerations for:

• Near-term spending;
• Intermediate retirement needs; and
• Longer-term growth.

Someone retiring in their 60s doesn’t necessarily stop being a long-term investor simply because the paycheck stops.

Some of that person’s money may be needed relatively soon.

Other portions may be intended to help fund spending decades into the future.

Different portions of your retirement money may have different jobs.

How Can Cash Help With Sequence of Returns Risk?

One potential approach to sequence risk is maintaining an appropriate amount of cash or other relatively short-term assets for upcoming spending needs.

The idea is straightforward:

If some near-term expenses can be funded without selling longer-term investments during a significant market decline, those investments may have more opportunity to participate in a potential recovery.

But that doesn’t mean every retiree should automatically hold one, two, or three years of expenses in cash.

The appropriate amount can depend on factors such as:

• How much you spend;
• How much of that spending is covered by Social Security, pensions, or other reliable income;
• Your investment allocation;
• Your tax situation;
• Your tolerance for market fluctuations;
• Your planned large expenses; and
• Your overall retirement-income strategy.

Cash should have a job within the retirement plan.

Too little liquidity can create pressure to sell investments at an inconvenient time.

Too much cash can create different long-term challenges.

The question isn’t simply, “How much cash should a retiree have?”

It’s:

“How much near-term spending should my retirement plan be prepared to fund without depending on what the market does next month?”

How Can You Reduce Sequence of Returns Risk?

You can’t know in advance whether the first year of your retirement will coincide with a bull market, a bear market, or something in between.

And trying to predict the next market downturn isn’t the objective of retirement planning.

Instead, the goal is to build enough flexibility into your retirement income strategy that a difficult stretch in the market doesn’t automatically force you to sell investments at an unfavorable time.

Potential planning strategies may include:

• Maintaining appropriate resources for near-term spending;
• Creating flexibility around discretionary expenses;
• Establishing withdrawal guardrails before a downturn occurs;
• Coordinating withdrawals across different types of accounts;
• Considering how Social Security and pension income fit into the plan;
• Maintaining an investment allocation appropriate for both near- and long-term needs; and
• Reviewing the plan periodically as markets, spending, taxes, and life circumstances change.

There isn’t one sequence-risk strategy that’s appropriate for every retiree.

The objective is to reduce the chance that a temporary market decline forces a permanent change in your retirement plan.

Can Flexible Retirement Spending Help During a Market Downturn?

Retirement projections often assume that spending increases predictably each year.

Real life may be more flexible.

Some retirement expenses are essential:

• Housing;
• Utilities;
• Food;
• Insurance;
• Healthcare; and
• Other basic living expenses.

Other expenses may have more flexibility:

• Travel;
• Major purchases;
• Home renovations;
• Gifts;
• Entertainment; and
• Other discretionary spending.

If markets experience a significant decline, temporarily reducing some discretionary withdrawals may leave more assets invested for a potential recovery.

That doesn’t necessarily mean dramatically changing your lifestyle every time the market has a bad month.

It means understanding which portions of your retirement spending are fixed and which portions could potentially be adjusted if your plan encounters an unusually difficult market environment.

Flexibility can be an asset in a retirement income plan.

What Are Retirement Spending Guardrails?

One challenge with adjusting spending during a market downturn is deciding when an adjustment is actually necessary.

Without a plan, retirees may react emotionally.

A relatively small market decline might cause someone to cut spending unnecessarily.

Another person might continue withdrawing the same amount even after their financial circumstances have changed significantly.

Retirement spending guardrails attempt to establish decision points in advance.

Rather than deciding what to do in the middle of a stressful market decline, a retiree and financial professional may establish guidelines for when spending or withdrawals should be reviewed.

For example, a retirement plan might identify circumstances that prompt questions such as:

• Should discretionary spending be temporarily reduced?
• Should a planned major purchase be delayed?
• Should withdrawals come from a different source?
• Should the portfolio be rebalanced?
• Has the probability of meeting long-term retirement goals materially changed?

The specific guardrails depend on the individual plan.

The value of a guardrail isn’t predicting the market. It’s deciding in advance how you’ll evaluate your response to it.

Where Should Retirement Income Come From During a Market Downturn?

Once retirement begins, the question isn’t only how much money you’ll withdraw.

It’s also:

Where will the money come from?

A retiree may have several potential sources of income or withdrawals, including:

• Cash;
• Taxable investment accounts;
• Traditional IRAs;
• Employer retirement accounts;
• Roth accounts;
• Social Security;
• Pensions; and
• Other income sources.

Those sources don’t necessarily have identical investment or tax characteristics.

That means a retirement withdrawal decision can potentially affect more than today’s cash flow.

It may also affect:

• Current taxable income;
• Future required minimum distributions;
• The amount remaining in tax-deferred accounts;
• The amount remaining in Roth accounts;
• Portfolio allocation;
• Future tax flexibility; and
• How much remains invested for later retirement.

This is one reason retirement income planning, investment planning, and tax planning shouldn’t necessarily be treated as three unrelated conversations.

The account you withdraw from can matter along with the amount you withdraw.

How Does Social Security Affect Sequence of Returns Risk?

Social Security can add another layer to the sequence-of-returns conversation.

Some retirees claim benefits when they first become eligible.

Others may consider delaying benefits in exchange for a higher monthly benefit later, subject to Social Security rules.

But delaying Social Security may create a bridge period in which more spending needs to be funded from other resources.

That creates an important planning question:

If you’re delaying Social Security, where will your income come from in the meantime—and what happens if markets decline during those years?

For some retirees, delaying Social Security may fit well within the broader plan.

For others, earlier benefits may make more sense based on health, longevity expectations, household circumstances, cash flow, portfolio resources, and other considerations.

The point isn’t that one claiming age eliminates sequence risk.

It’s that your Social Security decision and your portfolio withdrawal strategy can interact.

Social Security shouldn’t necessarily be evaluated separately from the retirement income plan it helps support.

Can Pension Income Help Reduce Reliance on Portfolio Withdrawals?

A pension or another reliable source of retirement income can change the sequence-risk calculation because it may reduce the amount that needs to be withdrawn from investments for regular living expenses.

Consider two retirees with identical portfolios and identical spending.

If one receives substantial pension income and the other relies almost entirely on portfolio withdrawals, the effect of a market downturn may be different.

The important question isn’t simply how large your investment portfolio is.

It’s how much of your lifestyle the portfolio is responsible for funding.

The more spending that must come from investments, the more important the interaction between withdrawals and market returns may become.

Should You Take More Investment Risk to Recover From a Market Drop?

After a significant market decline, it can be tempting to believe that the portfolio needs to “make the money back.”

That mindset can lead to taking additional investment risk at exactly the time when emotions are already elevated.

But a retirement portfolio isn’t competing against the market.

Its purpose is to help support the financial plan.

If a downturn occurs, the first question doesn’t necessarily need to be:

“How do we earn this back as quickly as possible?”

A more useful set of questions may be:

• Has the long-term retirement plan materially changed?
• How much money is needed from the portfolio in the near term?
• Are withdrawals coming from the resources intended for near-term spending?
• Does the investment allocation still match the retiree’s goals, risk tolerance, and time horizon?
• Should any spending assumptions be revisited?
• Does the portfolio need to be rebalanced?

Trying to recover a loss by taking substantially more risk can create a new risk rather than solve the original one.

Does a More Conservative Portfolio Eliminate Sequence of Returns Risk?

Not necessarily.

Reducing investment volatility may help limit the size of some portfolio declines, but simply moving to a more conservative allocation doesn’t make sequence risk disappear.

It may also introduce another trade-off.

A retirement lasting several decades may require some assets to continue growing to help address inflation and long-term spending needs.

Becoming too conservative too early could potentially reduce the portfolio’s long-term growth potential.

This is why sequence-risk planning is often more structural than simply choosing between “aggressive” and “conservative.”

The larger question is:

How is the retirement plan designed to provide income when markets aren’t cooperating?

Is Sequence of Returns Risk Only About the Stock Market?

No.

Stocks may receive most of the attention because equity markets can experience significant declines, but sequence risk is fundamentally about withdrawing from assets after they have declined in value.

Other investments can decline too.

Bond values, for example, can fluctuate as interest rates and market conditions change.

At the same time, inflation can increase the cost of the goods and services retirees need to purchase, potentially increasing the amount of income required from the portfolio.

So the retirement planning challenge isn’t simply:

“How do I avoid a stock market decline?”

It’s:

“How do I create a retirement income strategy that can adapt to different market and economic environments?”

How Can Rebalancing Fit Into a Retirement Income Strategy?

Market movements can change the composition of a portfolio over time.

If one type of investment rises significantly while another declines, the portfolio may eventually look very different from its intended allocation.

Rebalancing involves reviewing the portfolio and, when appropriate, adjusting holdings toward the intended allocation.

For retirees, rebalancing can also be considered alongside withdrawal decisions.

Rather than automatically selling the same investments every time cash is needed, withdrawals and portfolio adjustments may be coordinated within the broader investment strategy.

That doesn’t mean rebalancing can prevent losses or guarantee a particular retirement outcome.

But it can help keep the investment portfolio aligned with the plan rather than allowing market movements alone to determine its structure.

What Should You Review Before You Retire?

If retirement is approaching, sequence of returns risk is one reason to look beyond your projected average investment return.

A pre-retirement review may include questions such as:

• How much do you expect to spend during the first few years of retirement?
• How much of that spending will be covered by Social Security or pension income?
• How much will need to come from investments?
• Where will near-term retirement spending be held?
• How much cash or other short-term assets are appropriate for your plan?
• Which accounts are expected to fund withdrawals first?
• How might those withdrawals affect taxes?
• When do you expect to claim Social Security?
• Which retirement expenses are essential?
• Which expenses could be adjusted temporarily?
• What would you do if markets declined significantly during your first year of retirement?
• How frequently will the retirement plan be reviewed?

The last question may be one of the most important.

What happens if the market declines right after you retire?

If the only answer is “hopefully that doesn’t happen,” there may be more planning to do.

Frequently Asked Questions About Sequence of Returns Risk

What is sequence of returns risk in simple terms?

Sequence of returns risk is the possibility that poor investment returns early in retirement may have a greater effect on your portfolio because you’re withdrawing money while investments are down. Selling assets during a decline can leave fewer assets invested to participate in a potential recovery.

When is sequence of returns risk greatest?

Sequence risk can be particularly important during the early years of retirement, when withdrawals have begun and the portfolio may still need to fund many years of future spending. The exact level of risk depends on the retiree’s portfolio, withdrawal needs, other income sources, spending flexibility, and broader financial circumstances.

Can sequence of returns risk cause you to run out of money?

A poor sequence of returns combined with ongoing withdrawals can increase pressure on a retirement portfolio and may increase the risk that assets are depleted sooner than anticipated. It doesn’t mean a retiree will automatically run out of money after an early market decline. The outcome depends on many factors, including withdrawals, portfolio allocation, future returns, spending, inflation, other income, and the ability to adjust the plan.

How can retirees protect against sequence of returns risk?

Potential approaches may include maintaining appropriate near-term resources, coordinating portfolio withdrawals, creating spending flexibility, establishing retirement guardrails, maintaining an appropriate investment allocation, and periodically reviewing the retirement plan. No strategy can eliminate investment risk or guarantee that retirement assets will last.

How much cash should you have in retirement?

There isn’t one cash amount that’s appropriate for every retiree. The amount may depend on spending needs, Social Security and pension income, investment allocation, taxes, planned expenses, risk tolerance, and the overall retirement income strategy. Holding too little liquidity and holding excessive cash can each create different risks.

Should retirees stop investing in stocks?

Retirement doesn’t necessarily mean an investor no longer has a long-term time horizon. Some retirement assets may not be needed for many years. The appropriate allocation depends on the individual’s goals, spending needs, financial resources, risk tolerance, time horizon, and broader retirement plan.

What happens if the stock market crashes right after I retire?

A market decline immediately after retirement doesn’t automatically mean the retirement plan has failed. It may be appropriate to review near-term spending needs, available cash and income sources, planned withdrawals, discretionary expenses, investment allocation, and the long-term retirement projections before making significant changes.

Does delaying Social Security increase sequence of returns risk?

Delaying Social Security may require some retirees to fund more of their early retirement spending from other resources, including investment accounts. However, delaying benefits may also result in a higher monthly Social Security benefit later, subject to applicable rules. The appropriate claiming strategy depends on the individual’s broader financial circumstances and should be considered alongside the retirement income plan.

You Can’t Choose Your First Five Years of Market Returns

No one gets to choose the market environment that arrives immediately after retirement.

You might retire into a strong bull market.

You might retire shortly before a significant decline.

Or markets may move through several years of relatively ordinary fluctuations.

That’s the part you can’t control.

What you can potentially control is how much of your retirement plan depends on selling investments regardless of what markets are doing.

You can think ahead about:

• Where near-term spending will come from;
• How much spending flexibility you have;
• How withdrawals will be coordinated;
• How Social Security and other income sources fit into the plan;
• How your investment allocation supports different time horizons; and
• What circumstances would cause you to revisit the plan.

You can’t control the order of market returns. You can plan for how you’ll respond to them.

Retirement Income Planning Is About More Than an Average Return

Long-term investment returns matter.

But once you’re withdrawing money from a portfolio, the path those returns take can matter too.

Two retirees can begin with the same amount, withdraw the same amount, experience the same series of investment returns, and still have different outcomes simply because those returns arrived in a different order.

That’s why retirement planning involves more than selecting investments and assuming an average rate of return.

It can also involve coordinating spending, cash, investments, taxes, Social Security, pensions, and withdrawals so the plan has options when markets don’t behave as expected.

A retirement plan shouldn’t depend on the market cooperating during your first few years of retirement.

Is Your Retirement Plan Prepared for a Bad First Year?

If you’re approaching retirement, consider asking a different question than simply, “What return should my investments earn?”

Ask:

“What happens to my retirement plan if the market drops during my first year?”

Understanding that scenario before retirement may help identify decisions involving cash reserves, investment allocation, retirement spending, Social Security, and portfolio withdrawals while you still have time to plan for them.

At Nova Wealth Management, we help individuals and families look at retirement as a coordinated financial plan rather than a single investment account.

If you’re approaching retirement or want to understand how your retirement income strategy may respond to different market environments, Schedule a Meeting with our team.

Toll-Free: (888) 677-9910

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This article was developed using concepts discussed in the September 3, 2026 Forbes article by Andrew Rosen regarding sequence of returns risk and retirement income planning. Nova Wealth Management has expanded upon the topic for educational purposes.

Disclosure: Nova Wealth Management, Inc. is a Registered Investment Advisor. This material is provided for general educational and informational purposes only and is not intended as personalized investment, tax, or legal advice. The hypothetical examples included are for illustrative purposes only and are not intended to represent the performance of any specific investment or portfolio. Actual investment returns fluctuate and may result in gains or losses. No investment strategy can eliminate risk or guarantee that retirement assets will last for any particular period. Investing involves risk, including the potential loss of principal. Financial decisions should be based on an individual’s unique circumstances, goals, risk tolerance, time horizon, tax situation, and overall financial plan.