So after years of working hard and saving strategically, you’re considering stepping into retirement. But timing here is critical.
If you retire when the market takes a sharp dip, you could end up depleting your savings much faster than expected. This is the consequence of the sequence of returns risk.
So let’s take a closer look at this threat.
What Is the Sequence of Returns Risk?
Sequence of returns risk happens when you enter retirement and start withdrawing your savings at a time when your investments severely decline due to poor market conditions.
When this happens, you need to sell more investments to generate the same targeted amount of cash.
For instance, say you have a $1 million portfolio. You decide to stick with the standard 4 percent rule and aim to withdraw $40,000 to cover living expenses when you retire.
But let’s say your portfolio dips 20 percent when you retire. Now you’re left with $800,000. To generate that same $40,000, you’d need to withdraw 5 percent of your remaining portfolio instead of 4 percent.
To make matters worse, this leaves you with fewer assets that could benefit from growth and compound interest when the market recovers.
So the sequence of returns risk can drain your retirement savings at a rapid pace. This is concerning, especially when people are living longer and the average retirement could stretch beyond 30 years.
At worst, you end up outliving your savings.
Luckily, there are many ways to defend your savings against the sequence of returns risk. So let’s explore some options.
Diversification Is Key
You’ve heard it before and you’ll hear it again: Don’t keep all your eggs in one basket.
It’s important to build a portfolio with asset classes that don’t tend to correlate with each other. In other words, they don’t typically move in the same direction.
So if the stock market suffers, other assets like bonds and real estate investment trusts (REITs) may keep a balance.
And as you move closer to retirement, many advisers recommend you focus more on generally safer fixed-income investments like bonds and bond funds to preserve the money you’ve accumulated and mitigate risk.
But you’d still need some exposure to growth-oriented investments like stocks and exchange-traded funds (ETFs) in order to replenish the money you withdraw on an ongoing basis in retirement. Some experts suggest you subtract your age from 120 to get the percentage of your portfolio that should be devoted to equities like stocks and mutual funds.
You can also look into robo-advisors, which recommend a diversified portfolio based on specific circumstances such as your risk tolerance, age, and investment goals. And working with a qualified investment advisor can also help you develop a personalized and holistic investment plan.
Keep a Cash Bucket
To avoid touching investments like stocks and ETFs during a market decline in early retirement, you could create a specific reserve using assets such as cash, money market funds, and certificates of deposit (CDs). Ideally, this should cover living expenses for the first few years of retirement (one to three, for example). If the market drops, you can resort to this cash bucket to cover necessities without having to sell investments like stocks at a loss. This would also allow those stocks and similar assets to grow when the market recovers.
Create a Bucket Strategy
So we discussed how establishing a cash bucket to cover you for the first three years or so of retirement can mitigate the sequence of returns risk.
But you can also set up more time-related buckets holding different types of retirement assets.
For example, bucket 2 could cover you for years four to seven of retirement. It can hold generally lower-risk investments like bonds and bond funds.
Bucket three could cover years seven and beyond. It could be filled with assets like stocks, ETFs, and mutual funds. If the sequence of returns risk kicks in, you can draw from your less-risky buckets one and two without having to pour out bucket number three, which would likely be suffering from a market downturn. This would also give the third bucket time to recover and grow.
Cut Back During Market Downturns
The typical bear market lasts around 9.6 months, according to an analysis by Hartford Funds.
But anything can happen. Your growth-focused investments may need more time to recover. And even if your cash reserve can keep you afloat, unexpectedly high inflation can cripple the purchasing power of the cash you’re withdrawing in retirement.
So if things are looking bad, you may want to slow down a little. Cut back on non-essential and luxury expenses, especially big-ticket items.
And whichever assets you’re drawing from in a market downturn, you should consider withdrawing a smaller percentage than what you’re used to.
Strategically Manage Guaranteed Income
One of the main reasons why sequence of returns risk can be so catastrophic is that it is centered around the unknown, which is market volatility.
But there are forms of retirement income that don’t generally depend on market movements.
For instance, you can use a portion of your retirement savings to purchase a fixed annuity contract that could provide a guaranteed and predictable stream of income, regardless of market conditions.
And if you can, you can delay collecting Social Security benefits. For every year you wait past your full retirement age, your benefits get a spike of 8 percent. And you can get your maximum benefit amount if you delay until reaching age 70.
Of course, we say “guaranteed” lightly. The future strength of Social Security is uncertain, and annuity payments depend on the financial strength and claims-paying capacity of the insurance company issuing the annuity.
But historically, insurance companies have rarely failed. And when they do, state guarantee associations step in to protect the insured. And it’s highly unlikely that the Social Security Administration (SSA) would stop making payments in the future. But without congressional action in the next decade, future benefits could be delayed or cut.
The Bottom Line
Even if you’ve built a sizable nest egg, a major market downturn could deliver a devastating blow to your savings if it occurs early in retirement. The sequence of returns risk means selling investments at a loss and leaving less with the potential to grow in the future.
But there are actions you can take to defend your savings against this threat. These include always maintaining a well-diversified portfolio, strategically drawing down your retirement assets, and cutting back on withdrawals as well as expenses during market dips. A qualified financial advisor can also help you come up with a personalized investment plan.
The Epoch Times copyright © 2026. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
