Sequence of Returns Risk: The Retirement Danger That Has Nothing to Do With How Much You Saved

The Retirement Risk That Has Nothing to Do With How Much You Saved

Here's a myth we hear constantly: if you save enough money and invest it reasonably, your retirement income is basically set. Save the number, hit the number, you're fine. It's an understandable belief — and it's incomplete in a way that can genuinely hurt people. Two retirees can save the exact same amount, invest in the exact same portfolio, and withdraw the exact same percentage each year, and still end up in dramatically different places twenty years later. The difference isn't how much they saved. It's when the market went down.

This is called sequence of returns risk, and it's one of the most important — and least discussed — concepts in retirement income planning.

What Sequence of Returns Risk Actually Means

During your working years, the order in which your investments gain or lose value doesn't matter much, because you're adding money along the way and have decades for the average to play out. A bad year early in your career barely registers by the time you retire.

Retirement flips that around. Once you start withdrawing money instead of adding it, the order of returns suddenly matters enormously. A market downturn in the first few years of retirement forces you to sell more shares to generate the same income, leaving fewer shares left to recover when the market eventually bounces back. A retiree who experiences strong markets early and weak markets later can end up with significantly more money at the end of retirement than a retiree with the identical average return, just experienced in the opposite order.

Why the Popular Withdrawal Rules Don't Fully Solve It

Many people have heard of the "4% rule" — a guideline suggesting a retiree could withdraw around 4% of their portfolio in the first year of retirement, adjusting for inflation each year after. It came out of research from the 1990s testing withdrawal rates against historical market returns, and it's a useful starting reference point. But it was built on historical averages, not a guarantee about your specific retirement — and the research it's based on shows exactly why: the retirement years that came closest to failing weren't the ones with poor average returns, they were the ones that opened with a market downturn in the first several years.

In other words, a rule of thumb built around averages doesn't protect you from the two or three years right after you retire — the exact years when sequence of returns risk does the most damage.

The Timing Problem You Can't Fully Control

Here's what makes this especially frustrating: most people don't get to choose exactly when they retire. The 2026 EBRI Retirement Confidence Survey found that the median retirement age among current retirees was 62 — younger than most workers plan for — and that a large share of retirees leave the workforce earlier than intended, often due to health issues, job loss, or caring for a family member. You can't schedule your retirement around what the market happens to be doing that year. Which means sequence of returns risk isn't a risk you can plan away by simply "waiting for a good year." It has to be managed structurally, inside the plan itself.

Ways to Reduce the Impact

You can't eliminate sequence of returns risk, but there are practical ways to soften it:

• Keep a cash or short-term reserve so a down market doesn't force you to sell investments at a loss just to cover monthly expenses.
• Reduce withdrawals during down years when your plan allows for some flexibility in spending.
• Cover essential expenses with guaranteed income — such as Social Security, a pension, or an annuity with an income rider — so your portfolio only has to fund discretionary spending, not survival.
• Revisit your allocation before you retire, since the years immediately before and after retirement are the ones where this risk matters most.

The Takeaway

Sequence of returns risk is a reminder that a strong nest egg and a smart withdrawal plan are two different things — and that timing, not just total savings, shapes how long your money lasts. The good news is that this risk can be planned around, particularly by separating the income that covers your essential bills from the money that stays invested for growth. If you're within a few years of retiring, or already retired and want a second look at how your plan holds up against this kind of risk, we'd welcome the conversation.

This article is educational only and not personalized financial advice. Source: EBRI/Greenwald Research, 2026 Retirement Confidence Survey.