Don't Let the Market's Timing Derail Your Retirement: Understanding Sequence of Return Risk

When planning for retirement, most people focus on how much they’ve saved, their target withdrawal rate, and how their portfolio is allocated. But there’s a hidden risk that can undermine even the best-laid plans: sequence of return risk.

This often overlooked danger doesn’t get as much attention as inflation or interest rates, but it can make or break your retirement.

What Is Sequence of Return Risk?

Sequence of return risk refers to the timing of investment returns, particularly early in retirement. If the market performs poorly at the beginning of your retirement, even if the average return over 30 years is solid, it can cause irreversible damage to your portfolio, especially if you're taking regular withdrawals.

In simple terms: The order of your investment returns matters. A lot.

An Example to Illustrate

Let’s look at two retirees, Alice and Bob. They both retire with $1 million and withdraw $50,000 per year. Over the next 20 years, they each earn the same average return of 7.13%. The catch? Alice experiences bad market years early on, while Bob sees those same poor years at the end of his retirement.

Despite the same average return, Alice runs out of money in year 17, while Bob ends up with over $2,700,000 left. The only difference? The sequence in which the returns occurred.

Why Is This Risk So Critical?

When markets drop early in retirement and you’re simultaneously withdrawing funds, you’re selling investments at a loss. That means your portfolio has less capital to recover when the market bounces back. It’s a double hit: withdrawals + market decline = faster depletion.

Strategies to Manage Sequence of Return Risk

Here are some ways to mitigate the impact:

• Bucket Strategy: Segment your portfolio by time horizon, cash and conservative investments for short-term needs, moderate investments for mid-term needs, and a more aggressive allocation for needs that are far in the future.
• Flexible Withdrawal Strategy: Rather than sticking to a fixed amount, consider adjusting withdrawals in down years. In certain down years it is very advantageous to spend slightly less than you would in other years especially early in retirement. This will allow you to spend the full amount you desire in later years.
• Annuities or Pensions: Guaranteed income sources help reduce reliance on portfolio withdrawals. Although these products often have less growth potential, they do offer a security that can be very helpful. Additionally, if you struggle to live within your means these can be a good fallback incase you overspend.
• Delay Retirement or Social Security: A few extra working years or deterring Social Security can ease pressure on your savings. Although this is not always preferable, in certain circumstances it can be highly advantageous and should be considered as a potential.

Final Thoughts

Sequence of return risk is a powerful, silent threat. But with thoughtful planning and flexibility, you can defend your retirement from unpredictable market returns.

After all, it’s not just how much you earn that matters: it’s when you earn it.

OneAscent Financial Services, LLC (“OAFS”), d/b/a The Cornerstone Financial Group, is a registered investment adviser with the United States Securities and Exchange Commission. OAFS does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by OAFS or any unaffiliated third party. OAFS is neither an attorney nor accountant, and no portion of the presented content should be interpreted as legal, accounting, or tax advice. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly