Not long ago, I sat with a family of our financial planning practice I’ll call Denise and Robert.
They had done a lot right. They saved consistently, avoided lifestyle creep more than most and built a portfolio that looked strong enough on paper to support the retirement they wanted.
Then Robert asked the question I hear more often than people might think.
“If the market averages out over time, why are we so worried about what happens in the first few years?”
It was a fair question.
Most people are taught to think about investing in terms of average return. If the portfolio averages 6%, 7% or 8% over a long period of time, the assumption is that retirement should work as long as the math looks reasonable.
But retirement income planning does not work the same way as accumulation.
When you are working and adding money, a market decline can be uncomfortable. It can also create an opportunity. You are buying shares while prices are down. Your paycheck is still coming in. Time is still on your side.
When you are retired and taking money out, the same market decline can behave very differently.
That is where sequence of returns risk enters the conversation.
What Is Sequence of Returns Risk?
Sequence of returns risk is the risk that poor market returns happen at the wrong time, especially early in retirement when you are beginning to withdraw money from your portfolio.
The issue is not just whether your long-term average return is good. The issue is the order in which those returns happen.
Two retirees can have the same average return over 20 or 30 years and end up with very different results. One retiree may get strong returns early and have a much easier time sustaining withdrawals. Another may face a major downturn in the first few years and be forced to sell investments while they are down, leaving fewer shares available to recover when markets improve.
That is why sequence risk can be so dangerous. It does not always show up in a simple average return.
Charles Schwab describes sequence-of-returns risk as the impact that the order and timing of poor investment returns can have on how long retirement savings last. Schwab’s explanation focuses on the problem that arises when retirees withdraw from a portfolio that is losing value: they may need to sell more investments to raise the same amount of cash, leaving fewer assets available for future growth.¹
That is the part many people miss.
The market may recover. The portfolio may not recover the same way if too many shares had to be sold during the decline.
Why the First Years of Retirement Matter So Much
I often describe the first five to ten years of retirement as the fragile window.
That does not mean everything has to go perfectly. It means the plan needs to be built with the understanding that the first phase of retirement carries a different kind of risk.
During your working years, your portfolio is usually in accumulation mode. Contributions are going in. Market volatility can be absorbed over time.
In retirement, the portfolio may need to produce income every month. If the market drops and the same withdrawals continue, the loss is not just on paper. It can become a permanent reduction in the number of shares left to recover.
This is why the transition from saving to spending deserves real retirement income planning. It is not enough to know how much you have saved. You need to know how that money will create income, where withdrawals will come from, and what happens if the market does not cooperate early.
For Denise and Robert, this was the turning point in the conversation. Their concern was not whether they had saved enough in a general sense. Their concern was whether their retirement income would still work if the first few years were rough.
That is a different question.
And it requires a different plan.
Why the 4% Rule Does Not Eliminate Sequence Risk
Many retirees have heard of the 4% rule. The basic idea is that you withdraw a certain percentage from your portfolio in the first year of retirement, then adjust that dollar amount for inflation each year.
It is a useful starting point, but it is not a complete retirement income plan.
Morningstar’s retirement income research has suggested that a 3.7% initial withdrawal rate may be more appropriate for retirees seeking a 90% probability of still having funds after a 30-year time horizon. Morningstar also emphasizes that dynamic strategies can adjust withdrawals based on market performance and spending needs rather than following a rigid path every year.²
That matters because sequence risk is not solved by choosing one withdrawal percentage and ignoring everything else.
A withdrawal rule can give you a reference point. It cannot tell you whether to delay a large purchase in a bad market, draw from cash instead of stocks, reduce spending temporarily or coordinate Social Security with portfolio withdrawals.
Those decisions are where planning becomes practical.
If you are not sure whether your withdrawal plan accounts for this kind of risk, a complimentary second-opinion conversation can help identify the questions worth reviewing before retirement income begins.
The Hidden Problem: Selling Low to Create Income
Imagine a retiree needs $7,000 per month to support lifestyle expenses after Social Security and other income sources are considered.
If markets are healthy, the portfolio may be able to support that withdrawal in a fairly orderly way.
But if the market drops early in retirement, the same dollar withdrawal may require selling more shares than expected. Those shares are no longer in the portfolio when the market eventually recovers.
This is where the math and the emotion collide.
The retiree sees the account balance falling. The withdrawals still need to happen. The financial news gets louder. The natural instinct is often to sell more, go to cash or abandon the plan entirely.
This is why sequence risk is not just an investment issue. It is also a behavior issue.
At Genesis Wealth Advisor Group, we often talk about planning as a way to reduce forced decisions. A good plan does not prevent every difficult market. It gives members and families a process so they are not making their most important decisions in the middle of the worst headlines.
Planning Tools That May Help Manage Sequence Risk
There is no single tool that eliminates sequence of returns risk. The goal is to build a retirement income system that gives the portfolio room to recover and gives the retiree enough confidence to stay disciplined.
Here are several planning tools that may help.
A Cash Reserve for Near-Term Income
One of the simplest ways to reduce pressure on a portfolio is to keep a portion of near-term spending needs in cash or cash-like investments.
Schwab suggests retirees may consider keeping one year of expenses, after accounting for income sources such as Social Security, in cash investments, with another two to four years of expenses in high-quality short-term bonds or short-term bond funds.¹
The purpose is not to keep too much money out of the market forever. The purpose is to avoid being forced to sell long-term investments during a temporary decline.
For many retirees, the emotional benefit can be just as important as the financial one. If the next year or two of income is already set aside, a market decline may feel less like an immediate threat to the household.
A Bucket Strategy
A bucket strategy organizes retirement assets by time horizon.
The first bucket may cover near-term income needs. The second bucket may hold more conservative assets designed to replenish the first bucket over time. The third bucket may remain invested for longer-term growth.
The point is not that every retiree needs the same three buckets. The point is that money needed soon should not always be invested the same way as money needed ten or fifteen years from now.
That kind of structure can help a family understand which dollars are meant to provide stability, which dollars are meant to replenish income, and which dollars are meant to fight inflation over a long retirement.
Flexible Spending Rules
One of the biggest mistakes in retirement income planning is pretending that spending will be perfectly flat and predictable.
Real life does not work that way.
Travel may be higher in the early years. Healthcare costs may change later. Housing repairs can show up at the wrong time. Children and grandchildren may need help. Taxes can shift. Markets can be strong one year and difficult the next.
Flexible spending rules can help a retiree make small adjustments before a small issue becomes a larger one. That may mean pausing an inflation increase, delaying a discretionary purchase, drawing from a different account or temporarily reducing portfolio withdrawals after a difficult market year.
This is not about giving up the retirement you worked for. It is about building enough flexibility so one bad stretch does not define the next 25 years.
Coordinated Income Sources
Sequence risk is harder to manage when every dollar of retirement income depends on the investment portfolio.
Social Security, pensions, annuities, cash reserves, bond ladders and other income tools can each play a role depending on the family’s situation. The right mix depends on the household’s expenses, risk tolerance, tax picture, health, longevity expectations and goals.
This is also where financial planning and tax planning need to work together. Which account should income come from first? When should Social Security begin? Should Roth conversions be considered before required minimum distributions begin? How much cash is enough and how much becomes a drag on long-term growth?
These are not isolated decisions. They are connected.
For some families, especially those coordinating retirement, tax, estate, and business decisions, this may also become part of a broader Premier Virtual Family Office conversation.
For individuals and families who want another set of eyes on how the income pieces fit together, Genesis offers a complimentary retirement income review with no obligation.
What This Meant for Denise and Robert
When Denise and Robert first came in, they were focused on the portfolio balance.
By the end of the conversation, they were focused on the income system.
That was the real shift.
The answer was not to avoid the market. They still needed long-term growth. Inflation does not retire just because you do.
The answer was also not to take unnecessary risk and hope the average return worked out.
The better answer was to build a plan around the real risks they were facing: near-term income needs, market timing, tax coordination, Social Security and the emotional pressure that comes when the first years of retirement do not go exactly as planned.
That is what sequence risk forces retirees to confront.
Not “Will the market average out someday?”
But “Can my income plan survive the wrong returns at the wrong time?”
A Practical Next Step
If you are within five years of retirement, or recently retired, start with three questions:
Where will my first three to five years of retirement income come from?
What happens if the market drops early in retirement?
Which expenses are fixed, and which expenses could adjust temporarily if needed?
Those questions will not answer everything. They will reveal whether you have a retirement income plan or simply a portfolio you hope will behave.
Sequence of returns risk does not mean retirement has to feel fragile.
It means the order of returns matters, and the plan should be built with that reality in mind.
At Genesis Wealth Advisor Group, this is part of the work we do with members and families every day: turning retirement savings into a coordinated income plan that can support real life, not just an average return on a spreadsheet.
If you are nearing retirement and want to understand how sequence risk could affect your plan, you can schedule a complimentary retirement income planning conversation. It is free, with no obligation, and can serve as a second opinion on whether your income strategy is prepared for the wrong returns at the wrong time.
Sources
Charles Schwab, “What Is Sequence-of-Returns Risk?”
Morningstar, “Retirement Income Planning Playbook for Financial Advisors”
Disclosure
Scott E. Jones, BFA™, CPFA®, CRPC®, RFC® is the founder of Genesis Wealth Advisor Group, LLC, specializing in retirement income planning, 401(k) management, and wealth strategies for individual members, business owner members, and families. This article is for educational purposes only and does not constitute personalized financial, tax, or legal advice. Please consult with a qualified professional before making any financial decisions.