Sequence of Return Risk: Market Timing in Retirement

On March 19, 2026, financial experts discussed the sequence-of-returns risk and how market timing can impact a retirement portfolio. They explained that an early market decline can significantly deplete a portfolio over time.

Market Timing Matters: Understanding Sequence of Return Risk

Investors close to retirement should understand sequence-of-returns risk. This is the risk that the timing of investment returns, especially early in retirement, can interact with regular withdrawals. This combination can hurt the longevity of a retirement portfolio.

While in the case of long-term accumulation, contributions may offset volatility, a retiree needs the money for living expenses. Thus, in the event of a market decline in the early years of retirement, selling investments at low prices would reduce the principal base from which they may compound and run out prematurely.

In fact, two retired investors with identical investments and similar long-term market returns can face very different outcomes simply because of when they realize gains or losses. In other words, the timing of returns is more important than ever.

Why This Matters?

The sequence-of-returns risk is a crucial yet often overlooked factor in retirement planning. Unlike the accumulation phase, where the order of returns doesn't matter, during the withdrawal phase, it can be very important whether returns are gains or losses. Here are six points:

·       Sequence risk causes retirement savings to run out faster: Retirement savings deplete more quickly because market declines happen during retirement and withdrawals are taken. This speeds up depletion more than what average return figures suggest.

·       The timing of returns matters more than the average return: Two investors might get the same average returns over time, but their retirement savings could be quite different because of when returns occur. Early positive returns act as a safety net, while early negative returns weaken it.

·       Withdrawals during market drops lock in losses: Taking withdrawals during market declines to cover retirement costs solidifies those losses. As a result, recovery is limited because fewer assets remain to be recovered.

·       Early retirement years are particularly sensitive: The first 5-10 years post-retirement are the riskiest for sequence risk because this is when withdrawals are highest in relation to assets and when there is the least time to recover before having to pay long-term expenses.

·       Standard retirement guidelines may not provide adequate protection: Standard retirement guidelines, such as the 4% withdrawal rate, are based on normal market conditions. They do not account for sequence risk, which could cause assets to be depleted prematurely due to poor market performance in the early years.

·       Diversification and planning help reduce sequence risk: Diversified investments, withdrawal planning, cash reserves, and bond investments help retirees avoid sequence risk and give growth assets time to recover without liquidating them.

A Key Insight for Retirement Planning

What can we learn from the sequence of returns? The timing of a return is more important than the total number of returns. With careful planning for this possible issue, a retirement portfolio can last as long as needed.