The Hidden Risk That Can Derail Retirement Even With Strong Returns

A strong market and having "enough" saved does not always guarantee a successful retirement.

One of the most overlooked risks retirees face is called sequence of returns risk, and it has nothing to do with your portfolio's long-term average return. Instead, it has everything to do with when those returns happen, especially once you begin taking money out of the portfolio.

During your working years, market volatility might be uncomfortable but is usually manageable. A short-term downturn typically does not matter much, and most people are capable of adjusting their spending for a few months if the market dips. If you are still contributing to your accounts, you can buy at lower prices and give your investments time to recover. Retirement changes that picture. Once withdrawals begin, especially regular income withdrawals, a bad stretch early in retirement can permanently change the trajectory of the portfolio.

Here is why that becomes such a problem. When the market declines and you still need cash for living expenses, you may be forced to sell investments at lower prices. That means more shares or units are sold to produce the same income. After that, even if the market rebounds, the portfolio is rebuilding from a smaller starting point. In effect, the portfolio has less capital left to participate in the recovery, and that combination of losses plus withdrawals working together can shorten the life of a retirement portfolio far more than many people expect.

Extended downturns make this risk even more serious. The most famous example is the crash of 1929, which marked the start of the Great Depression. After the market peaked in September of that year, the Dow Jones Industrial Average fell roughly 89% and did not climb back to its previous high until November 1954, about 25 years later, based on price alone (Source: Federal Reserve History). Along the way came one of the longest sustained downturns in U.S. market history, a roughly five-year decline from 1937 to 1942 during which market values fell by approximately 60% amid severe economic and geopolitical disruption (Source: CNN Finance). Retirees who faced a downturn of that length, or even a multi-year decline in the early years of retirement, would have seen their portfolios shrink dramatically while still needing to fund their lifestyle. The risk of failure becomes much higher when the market does not recover quickly.

Consider the Following Example

Two retirees each start with $1 million invested in the S&P 500 and withdraw $60,000 per year, or $5,000 per month. Over 20 years, both accounts experience the same average return. So on paper, you might think they should end up about the same.

Here is where it gets interesting. Retiree A sees the actual sequence of returns from 2003 to 2022. Retiree B experiences a slightly different sequence. The first year is an 18 percent drop instead of a 28 percent gain because the first and last years are swapped.

Even though the average returns are identical, the outcomes are dramatically different. Retiree A maintains a healthy balance throughout retirement. Retiree B faces a down market early on and runs out of money by year 17. They had to sell more shares when prices were low, which left fewer assets to grow when the market recovered.

You can see this play out visually in the chart titled “Sequence of Returns Risk in Retirement: One Year Can Make All the Difference” on New York Life's website. It shows the two portfolios tracking side by side until the early losses pull Retiree B's balance permanently below Retiree A's. Timing alone can determine whether your portfolio lasts through retirement or runs dry years earlier. 

This is the heart of sequence of returns risk. It is not just the average rate of return that matters, but the order in which those returns arrive.

Reducing the Risk

So what can be done about it? One approach is to build more stability into the portfolio before or during retirement. For example, fixed-duration bond funds can be used as part of a broader strategy to help create a more predictable income layer. It is important to understand that there is a difference between owning generic bond funds and using a fixed-duration bond strategy. Traditional bond funds often have no maturity date and their duration can shift over time, which means their interest rate sensitivity can change when market conditions change. Fixed-duration bond funds, by contrast, target a specific maturity window and are designed to behave more predictably as they approach their target date. This can help reduce uncertainty around how they will react to interest rate moves and provide a clearer picture of potential income.

The goal is not to eliminate market risk entirely. The goal is to reduce the need to sell growth assets at the wrong time. This kind of structure can provide a buffer during market stress, but it is not a simple one-size-fits-all fix. Fund selection, duration positioning, income needs, and withdrawal planning all matter, and a bond strategy that works well in one situation may not be appropriate in another. That is why implementation is so important. The solution is not just "own bonds." It is designing a structure that supports your actual spending needs and your retirement timeline. At Oasis Wealth, we use what's often called a matched-bucket, or liability-driven, approach -- a framework many of our clients have come to know well.

There are also other ways to help reduce the impact of sequence risk. Some investors keep a reserve of short-term assets to fund near-term withdrawals. Others use flexible spending rules so they can reduce withdrawals in difficult markets. Diversification across asset classes can also help, although diversification alone does not remove the risk. The key is to create enough stability that one or two bad years, or an extended down market, does not force a permanent decision at the worst possible time.

This risk matters most for people nearing retirement and for those already withdrawing income. If you are within 5 to 10 years of retirement, this is a good time to ask whether your portfolio is designed only for growth, or whether it is also designed to produce income in a way that can withstand a rough market sequence.