While markets have generally trended upward over time, the order in which those returns occur can have a massive impact on your retirement success. And as you get closer to retirement, the window to recover from market downturns gets much smaller.
What Exactly Is Sequence of Return Risk?
Sequence of Return Risk is the danger that a bad stretch of market performance early in retirement can permanently derail your financial plan — even if long-term averages look good on paper.
In other words:
It’s not just how much your investments earn that matters; it’s when those returns happen.
A Simple Example
Let’s compare two retirees — both start with $1,000,000 and plan to withdraw $50,000 per year (adjusted for inflation) for living expenses.
Both average a 6% annual return over 30 years.
But the timing of those returns is different:
| Year | Retiree A (Strong Early Markets) | Retiree B (Weak Early Markets) |
| Years 1–5 | +10%, +8%, +6%, +7%, +5% | -10%, -12%, +2%, +4%, +5% |
| Years 6–30 | 4% average annually | 7% average annually |
Even though both investors average the same return over 30 years, Retiree A finishes with over $1.3 million remaining at age 95 — while Retiree B runs out of money by year 27.
That’s the harsh reality of withdrawing from a portfolio during a downturn. Losses early on mean you’re selling more shares to meet income needs — leaving less money to participate when markets eventually recover.
Why This Time of Year Is Critical
The end of the year is when many investors rebalance portfolios, harvest tax losses, and plan for next year’s withdrawals. It’s also when volatility often ticks up — as we’ve seen in many fourth quarters throughout history.
For pre-retirees and recent retirees, this is a crucial window to evaluate whether your portfolio is appropriately balanced between growth and stability before the new year begins.
Here’s why:
- Market corrections don’t wait for your retirement date. If you’re retiring in the next 1–3 years, even a modest downturn could affect your income plan.
- Year-end is “decision season.” Roth conversions, RMD planning, and withdrawal sequencing all depend on having a clear picture of your portfolio structure.
- The next bear market rarely announces itself. Adjusting allocations now — before the storm — can protect decades of work.
How to Manage Sequence of Return Risk
- Rebalance your portfolio before year-end. Make sure your risk level still matches your time horizon. Strong markets can push your stock allocation higher than intended.
- Build a cash and bond “bucket.” Keep 2–5 years of planned withdrawals in more conservative assets so you’re not forced to sell stocks during downturns.
- Stress-test your plan. Reach out to your Francis Financial planner to run your situation through MoneyGuide Pro financial planning software to model how your plan performs under different return sequences.
- Coordinate withdrawals across accounts. Strategically drawing from Roth, Traditional, and taxable accounts can help reduce taxes and preserve flexibility.
The Bottom Line
Sequence of Return Risk is one of the few factors you can plan around, not predict. And this time of year — when you’re naturally reflecting, reviewing, and rebalancing — is the ideal moment to take action.
As you near retirement, the goal isn’t to eliminate risk — it’s to control it.
A thoughtful shift toward a more conservative, balanced portfolio today can mean a steadier, more confident retirement tomorrow.
Did you know that your employer sponsors a great financial wellness benefit for you? If you are navigating financial decisions or facing financial difficulties, you can meet with a licensed financial planner at Francis at no additional cost to you. Any money topic is on the table and with Francis planners, you don’t have to worry about hidden sales angles. We don’t sell any products, make commissions, or take a percentage of your money, so you can be confident that the advice is solely being offered in your best interest. To schedule a meeting you can download the francisway app, go to francisway.com, or call us at 866-232-6457.
