By Murray Miller, Financial Strategist | RolloverRight.com

There’s a risk hiding inside most retirement portfolios that doesn’t show up on any statement, doesn’t trigger any alarm, and isn’t disclosed in any prospectus. It has nothing to do with picking bad investments. It has everything to do with timing. And for retirees who aren’t protected against it, it can quietly destroy a retirement that looked perfectly fine on paper.

The Risk That Doesn’t Have a Warning Label

If you’ve spent any time reading about retirement planning, you’ve probably heard plenty about market risk, the possibility that your investments lose value. You’ve heard about inflation risk, longevity risk, maybe even healthcare risk.

Sequence of returns risk is different. It’s subtler. And in some ways, it’s more dangerous than any of those, because it can wreck a retirement even when the market performs exactly as expected over the long run.

Here’s the core idea: it’s not just what your portfolio returns that matters. It’s when those returns arrive.

The order of your investment returns in retirement, the sequence, can mean the difference between a portfolio that lasts 35 years and one that runs dry in 15. Same average return. Same withdrawal amount. Completely different outcome.

Most advisors will show you an average. Very few will show you what happens when the bad years come first.

The Example That Makes This Impossible to Ignore

Let me show you exactly what I mean with real numbers.

Meet two retirees. Call them David and Carol.

• Both retire at 63 with $1 million.
• Both withdraw $55,000 per year, adjusted for inflation.
• Both experience an average annual return of 6% over their 25-year retirement.

The only difference is the order in which those returns arrive.

David gets lucky with his timing. His first five years look like this: +14%, +11%, +18%, +9%, +13%. Strong early gains. His portfolio grows even as he’s withdrawing. By year five, despite taking out $55,000 annually, his portfolio has actually grown. The bad years come later, but by then, the portfolio is large enough to absorb them without permanent damage. David finishes his 25-year retirement with over $800,000 remaining.

Carol retires the same year into the same market, except her sequence runs in reverse. Her first five years: -18%, -12%, -9%, +5%, +3%. She’s withdrawing $55,000 a year while her portfolio is dropping. She’s selling shares at the worst possible prices to fund her living expenses. Those shares aren’t there to participate in the recovery. By year 12, Carol’s portfolio is essentially exhausted. She runs out of money at 75, with potentially 15 or more years of retirement still ahead of her.

Same average return. Same withdrawal rate. David has $800,000 left. Carol has nothing.

That is sequence of returns risk. And no one put it on a warning label. Download the Rollover Decision Brief to see how this risk factors into the retirement income framework I use with clients.

Why This Only Happens in Retirement, Not During Your Working Years

This is the part that surprises a lot of people. Sequence of returns risk is essentially a retirement-only problem. Here’s why.

During your working years, market downturns are painful to watch, but they’re actually opportunities. When the market drops, you’re buying shares at lower prices with your ongoing contributions. When it recovers, those cheaply acquired shares multiply in value. This is dollar-cost averaging working in your favor.

The moment you retire and start withdrawing instead of contributing, the math flips completely.

Now you’re selling shares, often at the worst possible time, during downturns, to fund your living expenses. You’re doing the opposite of dollar-cost averaging. Every share you sell at a depressed price is a share that can’t participate in the recovery. The damage is permanent and compounding.

A 40-year-old investor who experiences a brutal bear market in year two of their investing life will almost certainly recover. A 65-year-old retiree who experiences a brutal bear market in year two of their retirement may not, because the withdrawals they’re forced to make during that downturn fundamentally alter the trajectory of the portfolio.

The transition from accumulation to distribution is the single most important shift in your entire financial life. It changes everything about how risk needs to be managed. Our Retirement Transition Planning process is built specifically around this shift.

The Two Conditions That Make Sequence Risk Most Dangerous

Not every retiree faces equal exposure to sequence of returns risk. Two factors amplify it significantly.

Factor One: A High Withdrawal Rate

The higher the percentage you’re drawing from your portfolio each year, the more vulnerable you are to a bad early sequence. A retiree withdrawing 3% of their portfolio annually has considerable cushion, even a significant early downturn doesn’t force devastating share sales. A retiree withdrawing 6% or 7% has almost no margin for error. A bad first decade can create damage that simply can’t be recovered from.

This is one of the many reasons a flat withdrawal rate applied without regard to individual circumstances is insufficient. Our article on what actually works for retirement withdrawal rates in 2025 goes deeper on why the standard 4% rule leaves too many retirees exposed.

Factor Two: Little or No Guaranteed Income

Here’s where the structure of your retirement income plan either protects you or exposes you.

If your essential living expenses are largely covered by Social Security, a pension, or other guaranteed income sources that don’t depend on the market, a portfolio downturn is painful to watch, but it doesn’t threaten your lifestyle. You’re not forced to sell at the bottom because you don’t need to sell. You can wait.

But if your portfolio is your primary income source, if you depend on it to cover most of your monthly expenses, then a significant downturn forces your hand. You sell regardless of price, because the mortgage doesn’t pause for a bear market and the grocery store doesn’t accept IOUs.

The more dependent you are on your portfolio for day-to-day income, the more devastating a bad early sequence becomes.

How I Protect Clients Against This, In Plain English

I’ve spent four decades thinking about this problem, and I want to share the specific approaches I use, not in financial jargon, but in plain language that actually makes sense.

The Bucket Approach

Think of your retirement assets divided into three distinct buckets, each with a different job.

Bucket one is cash and very short-term, stable assets, enough to cover one to two years of living expenses. This is your immediate income source. It doesn’t fluctuate with the market. When you need money, you draw from here.

Bucket two holds intermediate-term assets, bonds, dividend-paying investments, more conservative holdings. This is designed to refill bucket one over a three to ten year horizon. It’s not immune to volatility, but it’s considerably less volatile than the stock market.

Bucket three is your long-term growth engine, equity investments designed to outpace inflation over a decade or more. This bucket you don’t touch for years. It’s allowed to be volatile because you’re not depending on it for near-term income.

Here’s the key: when the market drops 30%, you don’t panic and you don’t sell. You keep drawing from bucket one. Bucket two has time to stabilize. Bucket three has time to recover. The sequence of returns risk hits bucket three, but bucket three doesn’t need to perform right now. It needs to perform over the next decade. And historically, given enough time, it does.

The Income Floor First

Before we talk about any investment strategy, the first thing I do with every client is build an income floor, guaranteed income from Social Security, pensions, and potentially certain structured products that covers essential expenses regardless of what the market does.

When your non-negotiable expenses are covered by non-market income, your portfolio becomes a different animal entirely. It’s no longer survival equipment. It’s a long-term growth vehicle and a source of lifestyle spending. That shift in function changes how it needs to be managed and dramatically reduces your sequence of returns risk exposure.

If you have a pension election coming up, how you take that benefit directly affects the strength of your income floor. The pension vs. lump sum guide walks through how to evaluate that decision before you sign anything permanent.

Flexible Withdrawal Strategy

One of the most powerful tools against sequence risk is also the simplest: the willingness to temporarily reduce withdrawals during a significant market downturn.

If your portfolio drops 25% in year three of your retirement and you reduce your withdrawals by 15% to 20% for a year or two, maybe you skip the international trip, maybe you pull back on discretionary spending, the mathematical impact on your portfolio’s long-term survival is enormous. You’ve removed a critical amount of forced selling at the bottom, allowing far more shares to participate in the recovery.

This only works if your essential expenses are covered elsewhere. Which brings us back, always, to the income floor.

A Story About a Couple Who Almost Learned This the Hard Way

About twelve years ago, a couple came to see me. He was a recently retired corporate executive, she was still working part time. They had $1.4 million in investments, were drawing about $80,000 a year from the portfolio, had modest Social Security, and felt confident they’d be fine.

Their previous advisor had built a solid growth-oriented portfolio. Good funds, reasonable fees, sensible diversification. On paper, everything looked fine.

What the portfolio wasn’t designed for was what happened in the first eighteen months of his retirement. The market took a significant hit. They kept withdrawing $80,000 a year because that’s what their lifestyle required. There was no income floor to fall back on, no bucket structure, no flexibility built in. By the time they came to me, the portfolio had dropped to just over $900,000, and critically, they’d been selling shares the entire way down.

We restructured everything. Built the income floor first. Created the bucket structure. Reduced the portfolio withdrawal rate by coordinating Social Security timing more aggressively. Within three years the portfolio had recovered and then some, but it was a closer call than it needed to be.

The lesson wasn’t that they’d made bad investment choices. The lesson was that the transition from accumulation to distribution requires a fundamentally different structure, and they’d never made that transition.

Find out if we’re a good fit and let’s make sure your retirement is structured to survive what the market throws at it.

What the Research Actually Says About Sequence Risk

I want to give you a few data points that put the magnitude of this risk in context.

Research from financial planning academics has consistently shown that the returns experienced in the first ten years of retirement have a disproportionate impact on whether a portfolio survives a full 30-year retirement. The first decade matters far more than the last two decades combined.

Studies have also shown that retirees who retired in years immediately preceding major market downturns, 2000, 2008, faced dramatically higher portfolio failure rates than those who retired just a few years later, even with identical average long-term returns. The timing of retirement, relative to market cycles, has historically mattered enormously.

None of this means you should try to time the market before retiring. It means you should build a retirement income structure that doesn’t require the market to cooperate in your first decade.

That’s a solvable problem. It just requires deliberate planning.

The Questions You Should Be Asking Your Advisor Right Now

If you’re within five years of retirement and you’ve never had a specific conversation with your advisor about sequence of returns risk, here are the questions worth asking:

“What happens to my retirement income plan if the market drops 30% in my first two years of retirement?”

If the answer is vague reassurance about long-term averages, that’s not an answer. You want to see a specific model showing how the portfolio behaves under that scenario, what you’d be drawing from, and how long the math still holds.

“How much of my essential monthly expenses are covered by guaranteed income sources that don’t depend on the market?”

If the honest answer is “not much,” that’s the core vulnerability to address before anything else.

“Do I have a liquidity buffer that would allow me to avoid selling investments during a significant downturn?”

If your portfolio is your only source of retirement income and it’s all invested, you have no buffer. Any downturn forces withdrawals at whatever price the market offers.

“How was my portfolio constructed differently for retirement income versus accumulation?”

If the portfolio looks essentially the same as it did during your working years, just with a withdrawal plan added, it may not be structured for the specific risks of the distribution phase. If part of your transition involves rolling over a 401(k) or pension lump sum, read the 401(k) Rollover to IRA guide before moving any money.

Schedule a complimentary conversation and bring these questions. I’ll give you straight answers.

Key Takeaways

• Sequence of returns risk is the danger that bad market returns early in retirement permanently damage a portfolio, even when long-term average returns are perfectly adequate
• The first ten years of retirement have a disproportionate impact on whether a portfolio survives a full 30-year retirement
• The risk is amplified by high withdrawal rates and dependence on the portfolio for essential living expenses
• The three most effective protections are a guaranteed income floor, a bucket structure that creates withdrawal flexibility, and the willingness to temporarily reduce discretionary spending during significant downturns
• This risk requires a fundamentally different portfolio structure than accumulation. Simply adding a withdrawal plan to a growth portfolio is not enough

Frequently Asked Questions

1. Is sequence of returns risk the same as market risk?

They’re related but meaningfully different. Market risk is simply the possibility that your investments lose value. Sequence of returns risk is specifically about the timing of those losses relative to when you’re withdrawing money. You can have a portfolio with moderate overall market risk that is extremely vulnerable to sequence risk if the structure requires you to sell during downturns to fund living expenses. Addressing sequence risk requires structural changes to how income is generated, not just changes to what’s in the portfolio.

2. Does sequence of returns risk apply to people who have large pensions?

Considerably less so, and this is one of the most underappreciated advantages of a solid pension. If your pension covers a substantial portion of your monthly expenses, your portfolio withdrawals are discretionary, meaning you can reduce or pause them during a market downturn without affecting your essential lifestyle. That flexibility is the primary defense against sequence risk. A retiree with a generous pension and Social Security covering 90% of their expenses faces dramatically less sequence of returns risk than one who depends on their portfolio for 70% of their income, even if both portfolios are the same size.

3. Should I move everything to cash when I retire to avoid this risk?

No, and this is an important distinction. The answer to sequence risk is not to eliminate growth from your portfolio. Inflation is a long-term threat that requires long-term growth assets to combat. A fully cash or bond portfolio protects against sequence risk but creates a near-certainty of purchasing power erosion over 25 to 30 years. The goal is a structure that insulates near-term income needs from market volatility while preserving long-term growth capacity. That’s a balance, not an extreme.

4. How does Roth conversion strategy interact with sequence of returns risk?

Thoughtfully done Roth conversions in the early years of retirement can actually reduce sequence risk exposure in two important ways. First, paying taxes now on converted amounts reduces future Required Minimum Distributions, which means less forced portfolio withdrawal in later years regardless of market conditions. Second, a Roth account can serve as a particularly flexible bucket, with tax-free withdrawals that can be sized precisely to avoid pushing you into a higher bracket in any given year. It requires careful planning, but the intersection of Roth strategy and sequence of returns risk management is one of the most valuable planning opportunities available to pre-retirees.

5. I’m already retired and didn’t know about this. Is it too late to do something?

Almost certainly not, and I want to be genuinely encouraging here, because this question comes up often. If you’re in the early years of retirement, there is still meaningful structural work that can be done: building or rebuilding a liquidity buffer, identifying income floor opportunities you haven’t maximized yet, adjusting withdrawal sequencing across different account types, and stress-testing your current plan against adverse scenarios. Even retirees who are several years in have options. The earlier you address it the better, but “later than ideal” is not the same as “too late.”

Murray Miller is a Financial Strategist with over 40 years of experience helping business owners, executives, military officers, healthcare professionals, and high-earning professionals build retirement income plans that hold through every kind of market. He has personally navigated retirement and knows what it feels like when the stakes are real.

Schedule a complimentary conversation to stress-test your retirement income plan.