How Does Sequence of Returns Risk Threaten Retirees Even With "Average" Returns?
What Is Sequence of Returns Risk?
Sequence of returns risk is one of the most important... and least understood... threats to retirement security. It is not just about how much your investments earn on average, but when those returns happen. If you hit a bear market in the first decade of retirement, your portfolio can be permanently damaged, even if the average return over 30 years is the same as someone who had good markets early on.
As researcher Wade Pfau explains: "A portfolio taking withdrawals is permanently impaired by early losses in a way that a portfolio purely growing with no distributions is not."
If you are withdrawing money during a downturn, you have to sell more shares at low prices. This reduces the number of shares left to recover when markets bounce back, locking in losses and increasing the risk of running out of money.
Why the First 10 Years Make or Break Your Retirement
Wade Pfau's research shows that about 77% of your final retirement outcome is determined by the returns in just the first 10 years of retirement. That means the timing of gains and losses matters far more than the average return over your whole retirement. Two retirees with identical 30-year average returns can end up with vastly different outcomes depending on whether those early years were good or bad.
Same Average Return, Opposite Outcomes
How Withdrawals Lock In Losses
Real-World Examples of Sequence Risk in Action
The 1973-1974 Bear Market
The S&P 500 dropped 48% and inflation averaged 9.3% per year. A retiree who started withdrawals at the beginning of 1973 lost about 30% of their savings in just two years, not counting inflation. Kitces research shows two retirees separated by just two years ended up with vastly different outcomes: the one who retired at the start of the crisis finished with \$278,000 after 30 years, while the one who retired after the recovery finished with \$3.36 million, even though their average returns were similar. Source
The 2000-2002 Dot-Com Crash
The S&P 500 lost 47.2%. A retiree with a \$1,000,000 portfolio withdrawing \$40,000 per year would have seen their balance nearly cut in half by the end of the third year. Even though the market eventually recovered, those early withdrawals locked in losses that could not be made up. Source
The 2008-2009 Financial Crisis
The S&P 500 fell 54%. Retirees who started withdrawals just before the crash saw sharp drops, but because the market rebounded relatively quickly, those following a 4% rule were able to recover. This shows that the length of the downturn matters as much as the depth.
The Mason vs. Dixon Story
Mason retired in 1983 with just over \$400,000 and ended with nearly \$2.7 million after 30 years of withdrawals. Dixon retired in 1967 with over \$2.1 million... five times Mason's starting wealth... but ran out of money before 30 years due to poor returns and high inflation in the first decade. The lesson: starting wealth matters far less than when you retire. Source
What the Research Says About Protecting Against Sequence Risk
- Morningstar 2025 research: Recommends a 3.9% safe starting withdrawal rate for a 90% chance of not outliving your savings over 30 years, lower than the old 4% rule, because of today's market conditions and heightened sequence risk. Source
- BlackRock and EBRI research: Adding a guaranteed income floor (Protected Lifetime Income, or PLI) can increase your potential retirement spending by an average of 22%. This helps shield you from having to sell investments at a loss during downturns. Source
- Blanchett, Finke, and Pfau: Retirees with higher levels of PLI can safely spend at rates up to 6%, compared to much lower rates for those relying only on withdrawals. Source
- Dynamic withdrawal strategies: Guardrails, which adjust spending up or down based on portfolio performance, have been shown to produce 15% higher median ending balances over 30 years compared to static withdrawal rules. Source
How Lifestyle-First Planning Shields You from Sequence Risk
Lifestyle-First planning uses Protected Lifetime Income (PLI) to cover your essentials and the non-negotiable adventures, experiences, and memories that matter most to you. That means your must-have spending is covered no matter what happens in the market, no matter how long you live. With a guaranteed income floor in place, you never have to sell investments during a downturn to pay your bills. Your portfolio stays invested and can recover while PLI takes care of what matters most.
This changes everything about how you experience market downturns. Instead of watching your portfolio drop and wondering if you will run out of money, you know your essentials are covered. You can let your investments do their job without being forced to sell at the worst time.
Sequence of Returns Risk: Myths vs. Truths
- Myth: Sequence risk only matters if you retire during a crash. Truth: Even moderate downturns early in retirement can have a lasting impact if you are withdrawing money, because you are forced to sell more shares at low prices.
- Myth: If my average return is good, I'll be fine. Truth: The order of returns matters more than the average. About 77% of your final outcome is determined by the first 10 years of returns.
- Myth: You can just wait for the market to recover. Truth: Withdrawals during downturns lock in losses, so your portfolio may never fully recover even if the market does.
- Myth: The 4% rule is always safe. Truth: Morningstar's 2025 research recommends a 3.9% starting withdrawal rate for 90% confidence, and even that can fail if markets drop early or inflation runs high.
- Myth: Protected Lifetime Income (PLI) means giving up all growth. Truth: PLI is used only for essentials and non-negotiables. The rest of your savings can still be invested for growth, upgrades, and legacy.
- Myth: Guardrails strategies are too complicated. Truth: Guardrails are designed to be simple and flexible, and research shows they lead to higher median balances and more spending flexibility. That said, they still cannot fully protect you from potentially having to spend less during a prolonged downturn.
Pros and Cons of Protecting Against Sequence Risk
Pros of Using PLI and Smart Withdrawal Strategies:
- Shields your essentials with Protected Lifetime Income (PLI), so you do not have to cut spending during bad markets
- Dynamic withdrawal strategies like guardrails let you spend more when markets are strong and pull back modestly when they are not
- Research shows retirees with a guaranteed income floor have 22% more potential spending power on average
- Guardrails strategies produce 15% higher median ending balances over 30 years compared to static rules
- Retirees with higher levels of PLI can safely spend at rates up to 6%
Cons to Keep in Mind:
- Requires careful planning to balance protected income and growth assets
- Some assets may be set aside for protected income, which can reduce liquidity for other goals
- Ongoing review is needed to adjust for inflation, market changes, and spending needs
- Not everyone is comfortable moving away from the approach they are used to
Summary
Sequence of returns risk is a real threat to retirees... even if your average return looks good on paper. The order of returns, especially in the first decade, can make or break your retirement. Protecting your essentials with Protected Lifetime Income (PLI), using dynamic withdrawal strategies, and planning for inflation can help you avoid the worst-case scenarios and give you the confidence to spend on the life you have worked hard to build. All numbers, statistics, and research findings are current as of 2026 and are for educational purposes only.
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Educational only -- not tax, legal, or individualized investment advice. Guarantees rely on the issuing insurer's claims-paying ability. Any figures shown are illustrative and may differ for your situation based on age, health, product features, fees, allocations, and market conditions. Past performance does not guarantee future results. Sequence of returns risk examples are hypothetical and for educational purposes only. Always consult with a qualified financial, tax, or legal professional for your specific situation.