Why the First Years of Retirement Matter Most: Understanding and Reducing Sequence of Returns Risk

Introduction

Retirement brings a welcome shift—from saving diligently to drawing down your nest egg. But it also introduces a new risk that many investors overlook: sequence of returns risk. Even if you’ve saved enough and invested wisely, poor market performance in the early years of retirement can significantly affect your long-term financial outcomes. Understanding this risk—and taking steps to mitigate it—can help improve your chances of maintaining financial confidence in retirement.

What Is Sequence of Returns Risk?

Sequence of returns risk refers to the danger that market declines early in retirement will negatively affect your portfolio’s longevity, especially when you're regularly withdrawing income. Even if the average return over time is reasonable, the order in which those returns occur matters a great deal once withdrawals begin.

Example: Imagine two retirees with identical portfolios and average annual returns of 6%. One experiences strong returns in the early years and poor ones later. The other experiences the reverse. Despite having the same long-term average return, the retiree with early losses may run out of money much sooner due to withdrawals locking in losses at lower values.

This happens because withdrawing from a shrinking portfolio magnifies the impact of negative returns—you’re selling more shares when prices are down, leaving fewer to recover when markets bounce back.

Why the First Years Are So Critical

• You’re most vulnerable early on. In the accumulation phase, a downturn is often a buying opportunity. But in retirement, particularly in the first 5–10 years, your portfolio may not have the same recovery window if you’re drawing income.

  
  

• Losses are harder to recover. Once investments are sold to meet spending needs, those dollars are no longer in the market to benefit from future gains.

  
  

• Longevity risk compounds the issue. If you live 20–30 years in retirement, early losses can leave your portfolio unable to sustain later withdrawals.

  
  

Strategies That May Help Mitigate Sequence of Returns Risk

1. Use a “Bucket” Strategy

Segment your retirement assets by time horizon:

• Short-term (0–2 years): Cash or cash equivalents.

• Medium-term (3–10 years): Bonds or conservative income-generating investments.

• Long-term (10+ years): Growth-oriented investments such as equities or diversified ETFs.

  
  

This approach may allow you to draw from more stable assets during market downturns, giving your longer-term investments time to potentially recover.

2. Maintain Flexibility in Spending

A flexible withdrawal strategy—where you reduce discretionary spending during down markets—can help avoid locking in losses. Tools like the “guardrails” approach adjust your income based on portfolio performance while keeping spending aligned with long-term goals.

3. Keep a Cash Buffer or Reserve Fund

Maintaining 1–2 years of essential expenses in cash or liquid savings may provide a buffer during market volatility. This allows you to temporarily pause investment withdrawals. However, it’s important to consider the trade-offs, such as lower growth potential and inflation risk.

4. Consider Partial Annuities

A partial annuitization strategy may offer predictable income and help reduce reliance on portfolio withdrawals. While annuities involve costs and limitations, they can serve as a volatility buffer for a portion of retirement income. It's essential to evaluate suitability on a case-by-case basis.

5. Delay Social Security Benefits

Delaying Social Security to age 70 can increase your monthly benefit and may provide more predictable income later in retirement. This higher baseline can reduce pressure on your investment portfolio during the early, more vulnerable retirement years.

6. Explore Part-Time Work or Semi-Retirement

Even modest income from part-time work can reduce the need to withdraw from investments early in retirement. This extra flexibility can allow your portfolio more time to rebound from market declines.

Final Thoughts

Sequence of returns risk is a critical consideration in retirement income planning—but it’s not insurmountable. Through thoughtful allocation, spending flexibility, and diversification, retirees can create strategies to help navigate early market downturns with confidence. At Rigden Capital Strategies, we help clients develop tailored retirement plans that are built to weather market cycles and adapt over time.

Your goals. Our strategies. Together, let’s make your goals happen.

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Rigden Capital Strategies was born out of a simple but powerful idea: financial advice should be personal, transparent, and built around your goals—not generic solutions or product-driven sales. Fueled by decades of experience and a desire to see clients truly succeed, we’ve created a process rooted in value, integrity, and progress.

As a fee-only fiduciary, we offer dynamic, stress-tested wealth plans tailored to your life. Our expertise spans investment management, retirement and tax planning, and estate guidance blending active and passive strategies to help your portfolio through any market. We believe in real relationships, clear strategies, and long-term results.

Disclosure

This content is for informational purposes only and should not be construed as personalized investment or financial advice. All investments involve risk, including possible loss of principal. Past performance is not indicative of future results. Please consult with a qualified financial professional before making any financial decisions. This content is for informational and educational purposes only and should not be interpreted as financial, legal, or tax advice. While we strive for accuracy, we do not guarantee the completeness or reliability of the information provided. Investment decisions should be based on individual circumstances, and we recommend consulting a qualified professional before implementing any financial, legal, or tax strategies. Past performance is not indicative of future results, and all investments carry risks, including potential loss of principal. No investment strategy can guarantee success or protect against loss in all market conditions. Investors should carefully consider their risk tolerance, investment objectives, and financial circumstances before making investment decisions.