What is Sequence of Returns Risk?

Why the Order of Your Investment Returns Matters More Than You Think

When you’re saving for retirement, investment returns are important—but when you’re living off your retirement savings, the order of those returns can matter even more.

This concept is called “Sequence of Returns Risk”, and it’s one of the most overlooked threats to a comfortable retirement.

The Academic Side: What the Research Tells Us

A well-known study published in the Journal of Financial Planning (Pfau, 2011) showed that retirees who faced market downturns in the first few years of retirement had a much higher chance of running out of money—even if their average annual return over retirement was the same as someone else who had better luck early on.

In other words, bad returns early in retirement can do lasting damage, because you're forced to withdraw funds while your portfolio is down—locking in losses and reducing the growth potential of what's left.

To illustrate:

●        Retiree A and Retiree B both earn an average of 6% annually over 30 years.

●        But Retiree A experiences negative returns in the first 3 years, while Retiree B experiences those same losses at the end.

●        Retiree A could run out of money more than a decade earlier than Retiree B—simply because of timing.

In Plain English: Why This Matters to You

Imagine you’re climbing a mountain. Getting to the top (saving for retirement) is hard work, but once you reach the summit, going down safely (retirement income planning) requires a whole different strategy.

If the ground is shaky just as you start descending—say, a stock market dip in your first few years of retirement—it’s a lot harder to recover. You’re spending money from your nest egg, and it doesn’t have as much time to bounce back.

It’s not just how much your investments return over time—it’s when those returns happen.

So How Do We Manage This Risk?

Here are several smart strategies we use with clients to help reduce sequence of returns risk:

●        Bucket Strategies

We segment your assets into short-, mid-, and long-term “buckets.” The short-term bucket—used for the next 1–3 years of income—can include cash, CDs, or even cash value from a life insurance policy, which provides principal protection and steady access to tax-advantaged funds when markets are down.

●        Guaranteed Income Streams

Pensions, annuities, and other structured income products can help cover your essential expenses. And since you’re not relying entirely on the market, you reduce the chance of being forced to sell investments in a downturn.

●        Dynamic Withdrawal Strategies

We adjust your withdrawals based on market performance—taking less in down years and more in strong ones. A flexible source of tax-free income—such as policy loans from a well-funded IUL—can help supplement your income when you're temporarily reducing investment withdrawals.

●        Tax-Efficient Drawdown Plans

Deciding which account to pull from (taxable, IRA, Roth, or cash value life insurance) can significantly affect how long your money lasts. Tax free withdrawals don’t increase your taxable income or affect Medicare premiums and Social Security taxation.

●        Rebalancing Discipline

Regular rebalancing helps control risk and harvest gains. When paired with non-market-correlated assets like cash value life insurance, this strategy ensures you always have somewhere to pull from—without selling investments at a loss.

Bottom Line: You Can’t Control the Market, But You Can Control the Strategy

No one knows what the market will do next year. But by planning for a variety of outcomes—especially the risk of poor returns early in retirement—you can stay on track, regardless of market ups and downs.

Your retirement income strategy should give you flexibility, security, and confidence.

If you'd like to explore how these strategies fit into your plan, we’re here to help.