What Is Sequence-of-Returns Risk? Why It Matters in Retirement

May 20, 2026

Retirement planning is not only about how much a portfolio earns over time. It is also about when those returns happen.

That timing can matter because retirement usually changes the way a portfolio is used. During working years, investors often add money to retirement accounts. During retirement, that pattern can reverse. The portfolio may need to provide income through regular withdrawals.

That is where sequence-of-returns risk becomes important.

Two retirees can earn the same average return over a period of years, yet end up with different results. The difference comes from the order of returns. If losses happen early in retirement while withdrawals are being taken, the portfolio may have less money left to recover when markets improve. This risk is especially relevant during the first years before and after retirement, when portfolio withdrawals and market losses can happen at the same time.

What Is Sequence-of-Returns Risk?

Sequence-of-returns risk is the risk that the order of investment returns can hurt a portfolio, especially when money is being withdrawn.

In simple terms, it asks this question:

What happens if poor market returns occur early in retirement instead of later?

The average return may look acceptable on paper. But if the early years include steep losses, and the retiree is taking withdrawals at the same time, the portfolio can shrink faster than expected.

This is different from regular market risk. Market risk focuses on the possibility that investments may rise or fall. Sequence-of-returns risk focuses on when those gains and losses happen in relation to withdrawals.

Investopedia defines sequence risk as the danger that the timing of withdrawals from a retirement account can negatively affect overall returns. It becomes more pronounced for retirees who rely on the portfolio for income.

A Simple Example of Sequence-of-Returns Risk

Consider two retirees. Each starts with a $1,000,000 portfolio. Each withdraws $50,000 at the beginning of every year. Each experiences the same annual returns over eight years, but in a different order.

The difference is timing.

Retiree A experiences losses early, while the portfolio is still large and withdrawals are beginning. Retiree B experiences gains early, which gives the portfolio a stronger base before weaker years arrive.

This is why sequence-of-returns risk can be so damaging. It is not only about whether markets decline. It is about whether the decline happens when the retiree is drawing income from the portfolio.

Sequence-of-Returns Risk Before Retirement vs. During Retirement

Sequence-of-returns risk does not affect every investor the same way. It is usually less damaging during accumulation years and more important during withdrawal years.

During Working Years

During working years, market declines can still be uncomfortable. But the investor may still be adding money through 401(k) contributions, IRA contributions, taxable account deposits, or employer retirement plans.

When contributions continue during a downturn, the investor may be buying shares at lower prices. There is still risk, but the cash flow direction is different. Money is going into the portfolio.

During Retirement

During retirement, the portfolio may shift from accumulation to distribution. Instead of adding money, the retiree may be taking money out.

That change matters.

Withdrawals during a down market can force the sale of assets after values have fallen. When assets are sold at lower prices, fewer shares or units remain invested for future growth. This can reduce the portfolio’s ability to recover.

The U.S. Department of Labor notes that retirement security takes planning, commitment, and money. It also points out that investment mix, inflation, and retirement needs all play roles in long-term outcomes.

Why Sequence-of-Returns Risk Is Important for Retirees

Sequence-of-returns risk matters because it can affect how long retirement savings last.

A retiree may have a reasonable withdrawal plan under average market conditions. But retirement does not unfold in averages. Returns arrive in uneven patterns. Inflation changes. Spending needs shift. Health costs can rise. Family needs may appear at the wrong time.

When early retirement losses occur, they can place pressure on several parts of the plan at once.

It Can Shorten the Life of a Portfolio

A poor return sequence can reduce portfolio value early. If withdrawals remain unchanged, the portfolio may need higher future returns just to get back on track.

This can be hard to recover from because retirement withdrawals continue year after year. A portfolio that loses value and keeps funding withdrawals has less capital left to compound.

It Can Pressure Retirement Income

Many retirees rely on several income sources, such as Social Security, pensions, portfolio withdrawals, cash reserves, rental income, or part-time work.

If the portfolio is taking early losses, the retiree may need to adjust how income is sourced. That could mean drawing more from cash, trimming discretionary spending, delaying a large purchase, or changing the timing of withdrawals from certain accounts.

It Can Force Decisions During Market Declines

Market declines are difficult enough. They become harder when a retiree needs money from the portfolio at the same time.

Without a plan, the retiree may feel forced to sell investments during a weak market. A better approach is to decide in advance which assets will fund near-term spending and which assets should remain invested for later years.

The Numbers Behind Sequence-of-Returns Risk

Sequence-of-returns risk matters because retirement withdrawals are not happening in a vacuum. Retirees still need income for housing, food, healthcare, taxes, travel, family needs, and other expenses while markets move up and down.

Here are a few numbers that put the risk in context:

The average annual spending for U.S. households age 65 or older was $61,432 in 2024, according to Bureau of Labor Statistics data reported through FRED. That figure was up from $47,573 in 2020, showing how quickly retirement spending pressure can rise over a few years.

Morningstar’s 2026 retirement income research estimated a 3.9% starting withdrawal rate for a new retiree seeking consistent inflation-adjusted withdrawals over a 30-year retirement, with a 90% probability of having money remaining at the end of that period. On a $1,000,000 portfolio, that equals $39,000 in the first year before taxes and fees.

Morningstar also found that retirees who faced poor investment returns in the first five years of retirement and did not reduce spending were much more likely to run out of savings than retirees who had positive early returns. The same research noted that high inflation early in retirement can also increase the chance of depleting funds if spending is not adjusted.

Longevity adds another layer. The Social Security Administration’s 2022 period life table, used in the 2025 Trustees Report, shows that a 65-year-old male had an average remaining life expectancy of 17.48 years, while a 65-year-old female had an average remaining life expectancy of 20.12 years. Many retirees may need their income plan to last well beyond the average, which is why early losses can carry so much weight.

These figures do not mean every retiree needs the same withdrawal rate or the same portfolio structure. They show why the first years of retirement deserve careful attention. A retiree may be withdrawing tens of thousands of dollars per year while also facing market declines, inflation, and a retirement period that could last several decades.

Common Factors That Increase Sequence-of-Returns Risk

Sequence-of-returns risk cannot be eliminated, but certain conditions can make it more serious.

Retiring During a Market Downturn

The first years of retirement can carry extra weight. If a retiree begins withdrawals right as markets decline, the portfolio may experience pressure before it has time to grow.

Morningstar’s retirement income research found that retirees who faced poor returns in the first five years of retirement and did not reduce spending were much more likely to run out of savings than retirees who experienced positive early returns.

Taking Large Withdrawals Early

Higher early withdrawals can amplify the damage from weak returns.

For example, a retiree withdrawing 6% or 7% of a portfolio in the first year may have less room for error than someone withdrawing a lower amount. The higher the withdrawal rate, the more pressure the portfolio faces during market declines.

Holding Too Much Volatility Near Retirement

A portfolio with heavy exposure to volatile assets may be vulnerable if retirement begins during a downturn.

Growth assets can still matter in retirement because the money may need to last for decades. But the portion needed for near-term withdrawals may require a different structure than the portion intended for later years.

Having Little Cash or Low-Volatility Reserve

If a retiree has no reserve for near-term spending, the portfolio may need to fund withdrawals from investments that have declined.

A cash reserve or lower-volatility bucket can create breathing room. It may allow the retiree to avoid selling certain assets during a downturn.

Read: Where should retirees put their money during volatile markets?

Ways to Manage Sequence-of-Returns Risk

Managing sequence-of-returns risk is not about predicting the next market decline. It is about preparing for the possibility that weak returns may occur early in retirement.

Build a Retirement Income Plan Before Withdrawals Begin

A retirement income plan should answer practical questions before the first withdrawal is taken:

• How much income is needed each year?
• Which expenses are fixed?
• Which expenses can be adjusted?
• Which accounts will be used first?
• How much cash should be available?
• What happens if the first three years include weak returns?

The goal is to avoid making withdrawal decisions one month at a time without a larger plan.

Use a Cash Reserve or Spending Buffer

A cash reserve can fund near-term expenses during market declines. This may reduce the need to sell growth investments after they have fallen.

The right size depends on spending needs, income sources, risk tolerance, and portfolio structure. Some retirees may hold one year of spending. Others may prefer a larger reserve. The key is to connect the reserve to the actual income plan rather than choosing a random number.

Use a Flexible Withdrawal Strategy

A fixed withdrawal plan may be simple, but it can be rigid during weak markets.

A flexible withdrawal strategy allows the retiree to adjust spending when conditions change. Morningstar’s research notes that flexible withdrawal strategies can help retirees avoid overspending during market weakness while allowing for higher spending during stronger environments.

Examples of flexible adjustments include:

• Reducing discretionary spending for a year
• Delaying a large purchase
• Pausing inflation increases temporarily
• Using a percentage-based withdrawal
• Creating spending guardrails tied to portfolio value

This approach does not mean cutting spending every time markets fall. It means having rules before emotion enters the decision.

Match Investments to Time Horizons

Money needed soon should not be treated the same way as money needed twenty years from now.

A time-based structure may divide the portfolio into different roles:

• Near-term money for spending needs
• Intermediate money for stability and income planning
• Longer-term money for growth and inflation protection

This structure can make the purpose of each asset clearer. It can also reduce the chance that a retiree sells long-term investments during a temporary downturn.

Rebalance With Discipline

Rebalancing can help keep the portfolio aligned with the retiree’s risk level.

If stocks rise sharply, the portfolio may become more volatile than intended. If stocks fall sharply, the portfolio may become too cautious if no action is taken. Rebalancing creates a process for adjusting the mix instead of reacting to headlines.

Michael Landsberg, Chief Investment Officer of Landsberg Bennett Private Wealth Management, discussed this point during a CNBC Power Lunch interview. While talking about fast-rising AI and memory-related holdings, he explained that the goal is not necessarily to exit a winning position completely. Instead, the process may involve trimming gains and reallocating capital elsewhere to keep portfolio risk in check.

As Landsberg said, “We diversify because we look at trimming and rebalancing and keeping the risk intact.” He also made it clear that trimming does not have to mean abandoning a strong holding: “Doesn’t mean I eliminate a position. I want to stick with winners a long time.”

That distinction matters for retirees. Sequence-of-returns risk is not only about market losses. It is also about how much risk is sitting inside the portfolio when withdrawals begin. A position or sector that rises quickly can become a larger share of the portfolio than intended. If that same area later falls during the early retirement years, withdrawals may be forced from a portfolio that has become too dependent on one part of the market.

Landsberg also noted that when a position continues to rise sharply, “we’ll be looking to take some of that money and reallocate it somewhere else.” For retirees, that kind of discipline can help reduce the chance that one fast-rising area quietly changes the risk profile of the whole retirement plan.

A disciplined rebalancing process can help retirees stay invested while reducing the chance that portfolio concentration adds pressure during weak markets.

Coordinate Social Security, Pensions, and Portfolio Withdrawals

Portfolio withdrawals should not be viewed in isolation.

Social Security, pensions, annuity income, part-time work, rental income, and cash reserves can all affect how much pressure is placed on investments. The Department of Labor notes that Social Security benefits replace a portion of pre-retirement income, with the actual amount depending on earnings and claiming age.

A retiree with reliable income covering core expenses may have more flexibility with portfolio withdrawals. A retiree relying heavily on investment withdrawals may need a more detailed spending and reserve strategy.

What Sequence-of-Returns Risk Does Not Mean

Sequence-of-returns risk is often misunderstood. It should not be used as a reason to avoid planning, avoid markets, or chase predictions.

It Does Not Mean Market Losses Can Be Avoided

Market losses are part of investing. The purpose of planning is not to predict exactly when declines will happen.

The purpose is to decide what the retiree will do if losses happen early.

It Does Not Mean Retirees Should Avoid Growth Investments

Some retirees become too focused on short-term stability and forget about long-term purchasing power.

Retirement can last 20 years, 30 years, or longer. Inflation can reduce the value of cash over time. Healthcare, housing, and lifestyle costs can change. Growth investments may still play an important role, but they need to be sized and paired with a withdrawal plan.

It Does Not Mean Average Return Is Useless

Average return still matters. A portfolio with weak long-term returns may struggle to support retirement income.

But average return does not tell the whole story. A retiree needs to understand how return timing, withdrawals, inflation, and spending flexibility work together.

Questions to Ask Before Retirement

A useful retirement income plan should be tested before retirement begins. These questions can help reveal weak points:

• How much annual income needs to come from the portfolio?
• What expenses are fixed, and what expenses can be adjusted?
• What happens if the first three retirement years include negative returns?
• How much cash or lower-volatility reserve should be available?
• Which accounts should be tapped first?
• How will withdrawals change during a down market?
• How often will the income plan be reviewed?
• How will Social Security or pension income affect portfolio withdrawals?
• What large expenses may occur in the first five years of retirement?

The value of these questions is not only in the answers. It is in the preparation they create.

Final Thoughts

Sequence-of-returns risk is one of the clearest examples of why retirement planning is different from saving for retirement.

During the saving years, the focus is often on contribution rate, investment selection, and long-term return. During retirement, the focus shifts. The order of returns begins to matter more because withdrawals are now part of the equation.

A retiree who faces strong early returns may have more flexibility later. A retiree who faces weak early returns may need to adjust spending, withdrawal timing, or account strategy sooner than expected.

The key is not prediction. The key is preparation.

A thoughtful retirement income plan can reduce the pressure created by early market losses. That plan may include cash reserves, flexible withdrawals, time-based investment buckets, disciplined rebalancing, and coordination between Social Security, pensions, and portfolio income. Sequence-of-returns risk cannot be fully controlled. But it can be planned for.