For most investors, the focus is on average annual return. But as you approach or enter retirement, something else matters just as much: the order those returns happen.
This is called sequence of returns risk. In plain terms, bad market years early in retirement can do far more damage than bad years later — even if your long-term average return is the same.
Why Timing Matters More Than You Think
Imagine two investors who both earn a 7% average annual return over 20 years.
- Investor A sees strong growth in their early retirement years.
- Investor B hits a significant market downturn in their first three years — right when they begin taking withdrawals.
Even though their averages are identical, Investor B’s portfolio may run out years earlier. When you withdraw money during a downturn, you’re selling investments at lower prices. That erodes the savings that need time to recover — and there’s less left in the account when the market eventually turns around.
A Practical Solution: The Bucket Strategy
Protecting yourself isn’t about avoiding the market. It’s about making sure you have the right money in the right place at the right time. We use a bucket approach to help organize your assets around when the money will actually be needed:
- The Cash Bucket: 1–2 years of living expenses in safe, easy-to-access accounts.
- The Intermediate Bucket: 3–7 years of expenses in investments designed to provide income.
- The Growth Bucket: Long-term investments designed to grow over time and help keep up with inflation.
When markets drop, you draw from the Cash Bucket first. As that runs low, the Intermediate Bucket acts as a bridge — giving the Growth Bucket the time it needs to recover without being forced to sell at the wrong moment.
Looking for more on keeping your allocation on track over time? See Is Your Portfolio Drifting Off-Trail?
A Tale of Two Portfolios
Both investors start with $1,000,000, withdraw $50,000 per year (adjusted for 3% annual inflation), and earn a 7% average return over 25 years. The only difference is the order of the returns.
| Period | Investor A (Good Start) | Investor B (Bad Start) |
|---|---|---|
| Years 1–3 | +15%, +12%, +18% | −15%, −10%, −5% |
| Middle Years | Steady 7% | Steady 7% |
| Final 3 Years | −15%, −10%, −5% | +15%, +12%, +18% |
| Result | Portfolio remains healthy. Early gains created a cushion that helped absorb the later losses. | Portfolio is depleted. Early losses combined with withdrawals left too little in the account to benefit from the later recovery. |
This example is for illustrative purposes only and does not represent actual investment results.
Is Your Retirement Plan Built for a Tough Start?
A retirement plan should do more than assume an average return. It should account for what happens if markets are weak right when you begin taking income.
For Current Clients: We’ll continue reviewing your cash reserves and withdrawal strategy to help make sure we’re not selling long-term investments at the wrong time.
For Prospective Clients: If you haven’t tested your retirement income plan against a tough market early in retirement, let’s take a look together.