Did I Retire at the Wrong Time?
Sequence of returns risk, explained: why the order of your returns matters more than the average.
Eleanor asked me the question in March of 2023. She was 66 and had retired at the end of 2021, almost exactly at the market’s peak, though no one knew that at the time. Now, a year and a half later, she had just opened a statement showing her portfolio was down 19% from its level on her last day of work. She and her husband spent 30 years building up $1.2 million, and in 18 months, the market had taken roughly $230,000 of it back.
She did not ask me about asset allocation. She did not ask about rebalancing. She asked, "Did I retire at the wrong time?" And underneath that question was a harder one she did not say out loud. She was asking whether the trip to see her granddaughter in Portland was still on the table, and whether the next ten years would look the way she had imagined, or smaller.
I want to answer Eleanor's question carefully, because it is the right question, and almost nobody in this industry answers it honestly. The honest answer is that the timing of your retirement matters enormously, that it matters in a way averages completely hide, and that there are specific things you can do about it. This piece covers all three.
The Lie Hiding Inside Average Returns
Here is a claim you have heard from every advisor, every fund company, and every retirement calculator: the market averages about 7 to 10% per year over the long run, so stay invested, and you will be fine.
For a 45-year-old contributing to a 401(k), that claim is roughly true. For a 66-year-old withdrawing from a portfolio, it is dangerously incomplete. The average return tells you almost nothing about whether your money will last. What matters is the order in which those returns arrive, and that is something no one can control or predict.
This is called sequence of returns risk: the danger that poor returns early in retirement, combined with withdrawals, will permanently damage a portfolio even if the long-term average turns out fine.
The reason this risk is so hard to detect is that it does not exist during your working years.
Why Order Suddenly Matters
Suppose you invest $100,000 and leave it untouched for three years. The market returns 18%, then 9%, then loses 20%. Your ending balance is $102,919. Now reverse the order: a 20% loss first, then 9%, then 18%. Your ending balance is $102,919. Identical, to the penny.
That is not a coincidence. It is arithmetic. When you are not adding or withdrawing money, returns simply multiply together, and multiplication does not care about order. Three times five is fifteen, and so is five times three. This is why the averages-based advice you received during your accumulation years was perfectly sound. Order genuinely did not matter then.
Withdrawals break the symmetry. The moment you start taking money out, every withdrawal interacts with whatever the market happens to be doing that year, and the order of returns starts to matter a great deal.
Watch what happens to two retirees who each start with $1,000,000, each withdraws $50,000 per year, and each earns the exact same three returns, just in reverse order.
Retiree A gets the good years first: 18%, then 9%, then a 20% loss.
- Year 1: $1,000,000 grows to $1,180,000, withdrawal leaves $1,130,000
- Year 2: grows to $1,231,700, withdrawal leaves $1,181,700
- Year 3: falls to $945,360, withdrawal leaves $895,360
Retiree B gets the loss first: down 20%, then 9%, then 18%.
- Year 1: $1,000,000 falls to $800,000, withdrawal leaves $750,000
- Year 2: grows to $817,500, withdrawal leaves $767,500
- Year 3: grows to $905,650, withdrawal leaves $855,650
Same starting balance. Same withdrawals. Same average return. After three years, Retiree B is roughly $40,000 behind, and that gap is permanent. It does not close when the market recovers, because the dollars Retiree B withdrew at the bottom are not in the portfolio to participate in the recovery. Every future gain compounds from a smaller base, forever.
Forty thousand dollars over three years may not sound catastrophic. But stretch the same dynamic across a thirty-year retirement, with inflation-adjusted withdrawals, and the gap grows into the difference between a portfolio that lasts and one that runs dry in your mid-eighties. Researchers who model this find that two retirees with identical average returns can end up with outcomes decades apart in portfolio life, purely because of which years the losses landed in. The early years carry almost all the weight.
The Hole Is Deeper Than It Looks
There is a second piece of arithmetic that makes early losses so damaging, and it is one most people have never worked through.
Losses and gains are not symmetric. If your portfolio falls 20%, you do not need a 20% gain to recover. You need 25%, because the gain is measured against a smaller base. Fall 33%, and you need 50%. Fall 50%, and you need a full 100% gain just to get back to where you started.
Now add withdrawals to that math. A $1,000,000 portfolio drops 20% to $800,000. Painful, but recoverable with a 25% gain. Except that a retiree cannot simply wait. She withdraws her $50,000 for living expenses, and now the portfolio sits at $750,000, which needs a 33% gain to return to $1,000,000. The withdrawal did not just reduce the balance. It raised the recovery bar.
This is the trap Eleanor was standing in when she called me. Every dollar she spends while the market is down makes the climb back steeper, and she has to spend. The groceries do not wait for a bull market.
The Part Nobody Wants to Say Out Loud
Here is the uncomfortable truth at the center of all this: sequence risk is luck.
You do not get to choose whether a bear market arrives in your first three years of retirement or your twenty-third. Someone who retired in March of 2009 stepped into one of the greatest bull markets in history and looks like a genius. Someone who retired in late 2007, with the same savings and the same discipline, spent their first two years watching the portfolio fall by nearly half. Neither of them did anything different. They were simply born eighteen months apart.
I find that most retirees are quietly relieved when I say this plainly. Eleanor did not make a mistake by retiring when she did. She made a plan based on reasonable assumptions, and the market dealt her a bad opening hand. The question is never whether you deserved the sequence you got. The question is whether your plan can survive it.
That reframing matters because it moves the conversation from regret, which is useless, to structure, which isn’t. You cannot control the order of returns. You can absolutely control how exposed your income is to that order. This is where the work is.
What You Can Actually Do About It
Here is the process I walk clients through when they face this risk, whether they are five years from retirement or already in it.
First, separate the money you will spend soon from the money you will not touch for a decade. Sequence risk only attacks dollars that get withdrawn during a downturn. Dollars you will not need for ten or fifteen years have time to ride out a full market cycle, and history has been kind to patient money over those horizons. The mistake most portfolios make is treating every dollar the same, which leaves next year's grocery money exposed to the same volatility as your legacy for the grandkids.
Second, know your income gap to the dollar. Add up your essential monthly expenses, the true non-negotiables, and subtract your guaranteed income sources, such as Social Security and any pension. What remains is your income gap, the amount your portfolio must produce no matter what the market does. Until you know this number, you cannot know how exposed you are. Most people who do this exercise find the gap is smaller than they feared, and that alone changes how they see a downturn.
Third, build an income floor under that gap. An income floor is guaranteed income sufficient to cover your essential expenses regardless of market conditions. Social Security is the foundation for almost everyone. For many retirees, it does not reach all the way, and the remainder needs to come from somewhere that does not fluctuate. I have written a full piece on how to construct this, and I will not repeat it here. The point for today is what a floor does to sequence risk: it removes the forced sale. If your essentials are covered by income that arrives regardless of market conditions, a crash in year one becomes something you watch rather than something you fund.
Fourth, hold a real cash buffer. Twelve to twenty-four months of your income gap in cash or equivalents means that when a bad year arrives, you spend the buffer instead of selling investments at depressed prices. The buffer earns very little, and that is fine. Its job is not growth. Its job is to keep you from ever being a forced seller, and measured against the recovery math above, it earns its keep in a single bad year.
Fifth, stress-test your plan against a bad opening, not an average one. Most retirement projections assume a smooth 6 or 7% every year, which is precisely the assumption sequence risk destroys. Run your plan with a 25% loss in year one and a flat year two, and see what happens. If the plan survives that, you can stop fearing headlines. If it does not, you have found the weakness while there is still time to fix it, which is the entire purpose of planning.
What I Told Eleanor
We ran her numbers. Her essential expenses came to about $6,500 a month. Social Security for the two of them covers $4,300 of it, leaving a gap of $2,200 per month, roughly $26,000 per year. Against a $970,000 portfolio, even after the decline, that gap was coverable, but it was being funded the fragile way, through sales of whatever happened to be liquid in a down market.
So we restructured. A cash buffer to carry the next two years of the gap without selling anything. A floor plan to cover the essentials permanently, which I will detail another time. A growth portfolio that she can now leave alone for a decade, because nothing she needs next year depends on it.
Eleanor's portfolio did not get any bigger the day we finished. Her retirement got stronger. The trip to Portland was booked, and she has since stopped reading her statements like weather reports.
The market will hand you a sequence, and you will not get to pick it. Protect the early years. The rest of retirement compounds from whatever they leave behind.
If you found this useful, the companion piece is Build the Floor First, which covers how to construct the guaranteed income layer that makes sequence risk survivable. For more retirement planning like this, subscribe to The Pensioner's Paradox, my free weekly newsletter.