Sequence of Returns

You retire with $2 million, and six months later the market has had a terrible stretch and your account is worth $1.6 million. Around the same time, your kids want to take the family trip you've talked about for years. It's going to cost $20,000.

You've run the plan, and even after the decline the numbers say the trip is affordable. But you're not looking at the projection when it's time to put down the deposit. You're looking at an account that's already down $400,000. Are you booking it?

$2,000,000At retirementthe balance the plan was run on

$1,600,000Six months laterafter a terrible stretch in the market

$20,000The family tripthe numbers still say it's affordable

The scenario in the text. Hypothetical, in round numbers.

That's where sequence of returns risk becomes more than an investment problem. The math matters because a bad market early in retirement can do more damage than the same bad market later, especially when you're withdrawing money at the same time. But a bad market can also change the way you use your money long after the market itself recovers.

01Why the timing of bad markets matters

While you're working, a market decline is uncomfortable, but your paycheck is still paying for your life. If you're contributing to your retirement accounts, you're also buying investments at lower prices. You don't like watching the balance fall, but you usually aren't selling those investments to buy groceries or pay the electric bill.

Retirement changes that relationship. Suppose your paycheck is gone and your investments need to provide $5,000 a month. If the market falls 25%, you still need the $5,000. Your bills didn't fall 25%, and neither did the cost of the things you planned to do with your family.

Your bills didn't fall 25%, and neither did the cost of the things you planned to do with your family.

If producing that $5,000 requires selling investments after they've fallen, less money remains invested for a later recovery. When poor returns and withdrawals happen together early in retirement, the effect can follow the portfolio for years. That's the basic math behind sequence of returns risk.

02Same returns, different order

Two people can retire with the same amount of money, take the same withdrawals and experience the same set of market returns over time. If those returns happen in a different order, they can end up in very different places. One gets several good years first and the bad years later. The other retires directly into the bad stretch.

Bad years first $2.0MGood years first $2.3M

Hypothetical yearly returns chosen to show the effect of their order, with the withdrawal taken at the start of each year. Not a forecast, and not the record of any investment.

Run your own sequence →

The average return can eventually look similar, but the second retiree was taking money out while the portfolio was already down. That combination can make the recovery harder. This is why the years around retirement deserve attention. You can't choose whether the market cooperates with your retirement date, but you can decide what your plan asks you to do if it doesn't.

03The spreadsheet isn't the whole story

Go back to the $20,000 family trip. You can rerun the projection with the lower account value. You can test different future returns, spending levels and life expectancies, and the plan may still show that you're fine. Technically, the trip still works.

But that's not necessarily how it feels. You're staring at an account that was worth $2 million and now says $1.6 million. Writing another $20,000 check can feel completely different than it did six months earlier, so maybe you wait. Then the market improves, but you're wondering whether another decline is coming. The kitchen remodel can wait too. Maybe you hold off on helping the kids with the house. Maybe you start questioning dinners out and every bigger purchase.

Five years later, your portfolio could be worth more than it was when you retired and you could still be living like someone who might run out of money.

Five years later, your portfolio could be worth more than it was when you retired and you could still be living like someone who might run out of money. That's a retirement risk too.

04A plan can work on paper and still be hard to use

This is why I don't think retirement planning can stop at a probability of success. The projection matters. You should understand whether the spending is reasonable and what different market environments could do to the plan. But if the plan says you can spend $20,000 and you're too afraid to do it, there is still work to do.

You've spent 30 or 40 years practicing one behavior: earn money, save some of it, invest it and try not to touch it. Then retirement arrives and you're asked to do almost the opposite. The paycheck stops, money starts coming out of the accounts, and a falling balance can feel like failure even when the plan expected it.

05What would have to be true for you to still take the trip?

That's a more useful planning question. Maybe you'd feel comfortable if you knew the next couple of years of spending weren't dependent on selling stocks. Maybe enough of your monthly life is covered by Social Security, a pension or other dependable income that the market balance doesn't feel like the source of every dollar you spend. Maybe you need to know exactly where the next stretch of withdrawals will come from.

The portfolio itself might also be structured so money you expect to use soon isn't taking the same risk as money you won't need for years. Or maybe nothing needs to change financially. You simply need to see the plan after the decline and understand why the trip still works.

• The next couple of years of spending aren't dependent on selling stocks.
• Enough of your monthly life is covered by Social Security, a pension or other dependable income that the market balance doesn't feel like the source of every dollar you spend.
• You know exactly where the next stretch of withdrawals will come from.
• Money you expect to use soon isn't taking the same risk as money you won't need for years.
• Nothing needs to change financially. You simply need to see the plan after the decline and understand why the trip still works.

Those answers come with tradeoffs. More cash may mean less expected growth. More dependable income can mean giving up liquidity or upside depending on how it's created. A different investment structure may behave differently in good markets. There isn't one structure everyone needs. The goal is to build a retirement plan you can actually use when the market is making you uncomfortable.

06Test the plan before the bad year arrives

You don't need to predict the next downturn to test this. Assume the market falls 25% six months after you retire. You still need your normal monthly withdrawal, and then a $20,000 expense comes up for something you genuinely want to do.

Where does the monthly withdrawal come from?

Where does the $20,000 come from?

Does taking it materially change the plan?

And even if the answer is no, would you actually spend it?

If you wouldn't, what would need to change for you to feel comfortable doing it?

That last question may tell you as much about your retirement plan as the numbers do.

Test it on your numbers →

07The risk isn't only what the market does to your money

You can run a retirement projection through bad markets, higher spending and a long life. That's important. But eventually the plan has to work with the person using it. You have to be able to watch the market fall and still use the money when the plan says you can.