Three Ways to Protect Your Retirement From Sequence of Returns Risk
Retiring in a down market doesn’t have to ravage your retirement, but safeguarding your savings requires planning well in advance.


Have you ever been forced to sell investments in a down market? If so, then you know it’s not a great feeling — and it’s probably something you’d like to avoid in the future.
Taking withdrawals during a market downturn can have a lasting impact on the longevity of your nest egg — especially if that downturn occurs early in your retirement. This is why preparing for sequence of returns risk, or sequence risk, should be a critical part of your retirement plan.
Why does the sequence of your returns matter?
There’s no predictable pattern for when the market will go up or down — and a bear market could happen when you least expect it. Sometimes, you might even experience negative returns for a whole year or for multiple years in a row.

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
If you’ve just started your retirement and you’re making systematic withdrawals during that time, there’s a chance you could shrink your portfolio to the point that you can no longer maintain your planned retirement lifestyle. (Remember, you won’t be making contributions anymore, so you won’t be able to build back your balance the way you could when you were still working.)
The reason this retirement bogeyman is called sequence of returns risk is because it’s about the order in which your returns occur — and it is, for the most part, a matter of good or bad timing. If you retire just before or after a bull market, your account may grow enough so you can more easily deal with a downturn later on. But if you retire in a bear market, your balance may never recover.
Here’s a basic example of how the sequence of returns could affect two retirees quite differently — even if they experience the same overall rate of return, start with the same amount of money ($500,000) and withdraw the same amount ($20,000) every year for five years.
Investor A gets lucky and starts his retirement during a bull market. His returns look like this:
- Year 1: +26.67%
- Year 2: +19.53%
- Year 3: -10.14%
- Year 4: -13.04%
- Year 5: -23.37%
Even with a huge loss in year five, because of his early success, Investor A finished the five years with $378,376.
Investor B is not so fortunate. She takes her long-planned retirement just as a painful bear market begins. Her returns come in the exact opposite order of Investor A’s:
- Year 1: -23.37%
- Year 2: -13.04%
- Year 3: -10.14%
- Year 4: +19.53%
- Year 5: +26.67%
Investor B ends up with $326,831. That may not seem like a big difference, but it’s $51,545 less than Investor A has left working for him — after just five years.
What can you do to prepare for sequence of returns risk?
The less time you have to make up for investment losses, the more important it is to protect your principal.
By the time you reach retirement, you may have read or heard the previous sentence so often that you’ll start tuning it out. But it’s something that everyone who expects to take regular withdrawals from their portfolios should keep in mind.
As you make a plan to safeguard your retirement income, here are some strategies to consider:
1. Know your sustainable withdrawal rate.
This is the estimated percentage of your savings you expect to be able to withdraw each year in retirement without running out of money. Don’t just assume it’s 4%. That was an old rule of thumb, but it may not work for you. There are formulas and online calculators that can give you an idea of what a safe withdrawal rate might be. But I suggest working with a retirement specialist — someone who understands your needs and goals — when designing your individual income and investment plan.
2. Think about using a retirement bucket strategy.
With a bucket strategy, you can be sure you’ll have the money you need in the short term while you continue growing money for later in retirement. You can tailor this strategy to suit your specific needs, but here’s how it generally works:
- Bucket No. 1, the short-term bucket, usually holds enough cash and cash equivalents (on top of your Social Security benefits and pension income) to cover your costs for three years. Having this money set aside at the start of your retirement could help you avoid having to sell stocks at a loss if a market downturn should occur.
- Bucket No. 2, the intermediate-term bucket, typically holds some type of low-risk or guaranteed income investment to replenish the short-term bucket. Some options might include fixed annuities or multi-year guaranteed annuities (MYGAs), CDs or short-term high-quality bonds held to a laddered maturity. (In my opinion, long-term bond funds are not a suitable solution for the principal-protected portion of your portfolio. There are many investments available that provide better stability these days.)
- Bucket No. 3, the long-term bucket, usually holds higher-risk investments (such as stocks) to provide the growth you’ll need as a hedge against inflation and longevity risk later in retirement.
3. Don’t put off retirement planning.
If you’ve been DIYing your portfolio for years, or if you’re working with a financial professional who isn’t retirement-focused, you may have to make serious adjustments to transition from accumulation to preservation.
Some of these changes can take time, so don’t wait until you’re a few months or even a couple of years away from your planned retirement date. In the best-case scenario, you should start to shift your mindset and your money 10 years out — but five years ahead of time is a minimum.
Kim Franke-Folstad contributed to this article.
The appearances in Kiplinger were obtained through a public relations program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.
Related Content
- Five Tax Moves Retirees Should Consider Before Dec. 31
- Nervously Nearing Retirement? Four Do’s, Four Don’ts and One Never
- Five Reasons You’ll Blow Up Your Retirement Plan
- To Create a Happy Retirement, Start With the Three Ps
- Five Common Retirement Mistakes and How to Avoid Them
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

David McGill is president of Comprehensive Financial Consultants, which he founded in 1998. He is an Accredited Investment Fiduciary (AIF®) and a financial professional who can offer both investment advice and insurance products. McGill has passed the Series 7, 24, 63 and 65 securities exams and has life, health and annuity insurance licenses.
-
Dow Rips 846 Points to New All-Time High: Stock Market Today
Fed Chair Jerome Powell seems ready to cut interest rates in the fall but will still rely on incoming economic data about inflation and employment.
-
Test Out Your Retirement Before You Call It Quits
It's not easy to take a retirement back. Before you make the plunge, test the waters with these tips.
-
When You Need Capital Quickly, Think 'Ready, Set, Fund': A Financial Adviser's Strategy
Investors must be able to free up cash to meet short-term needs from time to time. This strategy will help you access capital without derailing your long-term goals.
-
I'm an Estate Planner: Moving Family Assets to a Safe Haven Abroad Could Be a Huge Headache for Your Heirs
In troubled times like these, wealthy clients may seek financial refuge outside of the U.S. But that could cause more tax and estate problems than it solves.
-
Fall Is Tax Time? Yes! Act Now to Make Needed Adjustments
Review your withholdings, contribute to tax-saving HSA and FSA accounts, manage a bonus' impact and adjust for major life events such as weddings and job changes.
-
Board Service in Retirement: The Best Time to Join a Board Is Before You Retire
Many senior executives wait until retirement to take a seat on a corporate board. But making this career move early is a win-win for you and your current organization.
-
A Financial Professional's Take on Long-Term Care Insurance: Buy or Not?
Unless you have about $6,000 burning a hole in your pocket every month, you should make a plan in case you need long-term care. Luckily, you have options.
-
How to Unearth Sustainable Investment in Mining: A Financial Professional's Guide
Mining is likely to play a critical role in the global transition to more environmentally friendly energy resources. Here's how you can balance the opportunities and the risks.
-
Don't Be a Sucker: The Truth About Guarantor and Cosigner Agreements
There are significant financial and relationship risks involved if you agree to be a cosigner or guarantor. Make sure you perform your due diligence, and know exactly what you're getting into, before agreeing to such a commitment.
-
The Hidden Risk Lurking in Most Retirement Plans: Human Behavior
What's one of the differences between a good financial adviser and a great one? The ability to use behavioral coaching to guide clients away from emotional decision-making and toward retirement success.