Your portfolio has averaged 7% annual returns for the past 20 years. Your retirement calculator says you’re golden. You retire at 65.

The market drops 30% in your first year of retirement.

Are you still okay?

Probably not. And this is the retirement risk almost no one understands until it’s too late.

What Is Sequence of Returns Risk?

Sequence of returns risk is the danger that you’ll experience poor market returns early in retirement - exactly when you’re starting to withdraw money from your portfolio.

Here’s the problem: When you’re withdrawing money, the order of returns matters enormously. Two retirees with identical portfolios and identical average returns can have completely different outcomes based solely on WHEN they experienced good vs bad years.

The Math That Ruins Retirements

Retiree A: Lucky Timing

  • Year 1: +20% return (withdraw $40k)
  • Year 2: +15% return (withdraw $41k)
  • Year 3: -10% return (withdraw $42k)
  • Average return: 8.3%

Retiree B: Unlucky Timing

  • Year 1: -10% return (withdraw $40k)
  • Year 2: +15% return (withdraw $41k)
  • Year 3: +20% return (withdraw $42k)
  • Average return: 8.3%

Same average returns. Retiree A’s portfolio is thriving. Retiree B is in serious trouble.

Why? Because Retiree B sold shares at depressed prices in year 1 to fund living expenses. Those shares never recovered IN THEIR PORTFOLIO because they’re gone. They locked in losses.

Real-World Example: 2000 vs 2010 Retirees

Let’s look at two actual retirees with $1M portfolios and 4% withdrawal rates:

Retiree 2000: Retired January 2000

  • Immediately hit by dot-com crash (-9.1% in 2000, -11.9% in 2001, -22.1% in 2002)
  • Withdrew $40k/year while portfolio was cratering
  • By 2025, portfolio would likely be depleted or severely damaged despite recovery

Retiree 2010: Retired January 2010

  • Rode the entire bull market from bottom (2009-2020)
  • Same $40k/year withdrawals, but from a growing portfolio
  • By 2025, portfolio likely still healthy despite 2022 downturn

Both followed the same strategy. One is fine. One might be broke.

The only difference? Their retirement date.

Why This Matters More Than You Think

1. You Can’t Out-Save This Problem

Having “enough” based on average returns doesn’t protect you. A 2000 retiree with $1.5M had MORE than enough based on historical averages - and many still ran into trouble.

2. The “Safe Withdrawal Rate” Isn’t Actually Safe

The famous 4% rule? It failed for people who retired in 1966 or 2000. Not because they spent too much, but because they started withdrawing during bad sequence periods.

3. Early Retirement Magnifies The Risk

If you retire at 65 with a 30-year time horizon, you have three decades to recover from early losses. Retire at 55? You need your portfolio to last 40+ years - and early losses compound the damage.

4. Required Minimum Distributions Don’t Care About Markets

At 73 (or 75, depending on SECURE Act 2.0), the IRS forces you to withdraw from tax-deferred accounts. If you hit RMD age during a bear market, you’re selling low whether you want to or not.

The False Security of Average Returns

Every retirement calculator shows you average returns:

  • “Assuming 7% average annual returns…”
  • “Based on historical 10% equity returns…”
  • “With a balanced 60/40 portfolio averaging 6%…”

These numbers are lies of omission.

Yes, the stock market has averaged ~10% over the long term. But retirement isn’t the long term for your SPENDING MONEY. When you’re withdrawing 4-5% per year, you don’t get to participate in the full recovery.

Example:

  • $1M portfolio
  • Year 1: -30% = $700k (then withdraw $40k = $660k remaining)
  • Year 2: +30% = $858k (then withdraw $41k = $817k remaining)

You’re down $183k despite “breaking even” on returns. The withdrawals killed you.

How to Model This Risk (Not Just Hope For The Best)

Most retirement software shows you a single projection line based on average returns. That’s useless for understanding sequence risk.

What you actually need:

1. Monte Carlo Simulations

Run thousands of different return sequences to see the distribution of outcomes. Not “will I be okay?” but “how often do I run out of money, and when?”

2. Historical Sequence Testing

Model your portfolio through every historical 30-year period. What happened if you retired in 1929? 1966? 2000? 2007? Which periods broke your plan?

3. Stress Testing

What if the first 5 years average -3%? What if you retire into another 2008? Can your plan survive?

4. Dynamic Withdrawal Modeling

Most calculators assume you withdraw the same amount every year (inflation-adjusted). Reality: you can cut spending in bad years. Model what happens if you reduce withdrawals by 20% when portfolio drops 30%.

Protection Strategies That Actually Work

Strategy 1: Build a Cash Buffer (2-3 Years)

Keep 2-3 years of living expenses in cash/short-term bonds. In down markets, spend from the buffer instead of selling equities at a loss. In up markets, replenish the buffer.

Example:

  • $1M portfolio
  • Need $40k/year = keep $80-120k in cash
  • Remaining $880-920k invested for growth

This lets you wait out most bear markets without forced selling.

Strategy 2: Retirement Date Flexibility

If you’re planning to retire in 2026 and the market crashes 25% in 2025, don’t retire in 2026. Work one more year. Let your portfolio recover before you start withdrawals.

This is why “I’ll retire at exactly 62” is dangerous. You need flexibility around your target date.

Strategy 3: Roth Conversion Planning

Convert traditional IRA money to Roth during low-income years BEFORE retirement. This:

  • Reduces future RMDs that force selling in down markets
  • Creates tax-free money you can access without tax impact
  • Gives you withdrawal flexibility by account type

Strategy 4: Part-Time Income in Early Retirement

Even $20-30k/year from part-time work in your first 5 years of retirement can dramatically reduce sequence risk. You’re withdrawing less (or nothing) from the portfolio during the critical early period.

Strategy 5: Dynamic Spending Rules

Commit to spending cuts if portfolio drops significantly:

  • Portfolio down 20% from peak? Cut discretionary spending 15%
  • Portfolio down 30%? Cut discretionary spending 30%
  • Use guardrails: if portfolio falls below 80% of projection, trigger spending cuts

The TCJA 2026 Complication

Here’s a wrinkle most people aren’t considering: when the Tax Cuts and Jobs Act expires in 2026, tax rates increase. This affects sequence risk in two ways:

1. Higher tax drag on withdrawals
If you’re withdrawing from traditional IRAs in a down market AND paying higher taxes on those withdrawals, you’re in double trouble.

2. Roth conversion window closing
2025 might be your last year to convert at current (lower) rates. If you don’t model this, you might miss the window.

Implication for sequence risk:
Converting to Roth in 2025 gives you tax-free money in the future. In a 2026-2027 bear market scenario, having Roth dollars means lower tax impact on withdrawals.

What Your Retirement Software Should Show You

If your planning tool doesn’t show you these things, you’re flying blind:

✓ Percentile outcomes (10th, 25th, 50th, 75th, 90th percentile portfolio values over time)
✓ Failure scenarios (in what % of simulations do you run out of money, and when?)
✓ Stress test results (what happens in 2008-style crashes at different retirement dates?)
✓ Dynamic withdrawal impact (how much do spending cuts improve success rate?)
✓ Account type sequencing (which accounts to tap first to minimize sequence risk?)

Most “retirement calculators” show you one line going up. That’s not planning - that’s hoping.

The Bottom Line

Sequence of returns risk is the hidden danger that can wreck a well-planned retirement. Average returns don’t protect you. Historical success rates don’t guarantee your success.

What matters:

  1. When you retire relative to market cycles
  2. How much flexibility you have in timing
  3. Whether you have buffers to avoid forced selling
  4. If you can reduce spending in down markets
  5. Your withdrawal strategy across different account types

The good news? This risk is modelable and manageable - if you use the right tools and understand what you’re protecting against.

Want to see how YOUR retirement plan handles different sequence scenarios? Download Fatboy Financial Planner and run Monte Carlo simulations on your actual numbers. See your 10th percentile outcome - the version where everything goes wrong early. Then build protections around it.

Because retirement planning isn’t about hoping for average returns. It’s about surviving the bad sequences.

Have questions about modeling sequence of returns risk in your plan? Email: fbfinancialplanner@gmail.com