This article is part of the Retirement Financial Life Equation (RFLE) series. It was initially published on July 9, 2017, and updated in March 2026.
As I wrote years ago, wise saving is an essential part of biblical stewardship (Proverbs 13:11; 21:20). We save for needs we’re aware of in the near term—car repairs, insurance payments, home maintenance—and anticipated future needs like college expenses and retirement.
We also try to be wise regarding how much we save to avoid hoarding, and how we invest our savings—keeping money we’ll need soon in safe places while accepting more volatility for long-term savings based on our tolerance for inevitable market ups and downs.
As a general rule, the younger you are the more stock market volatility risk you can take, simply because you have more time to recover from inevitable down years. But as you get older, your risk tolerance should probably decrease—not just emotionally, but mathematically.
Investment risk is best addressed by diversifying and adjusting your asset allocation. Diversifying across stocks, bonds, and other investments, then deciding which asset classes you want to hold and how much of your money to allocate to each, is the best way to mitigate risk while still earning reasonable returns.
An important question that becomes personal
Back in 2017, some friends asked me to review their retirement portfolio. They had an important question. Since they were heavily invested in stock mutual funds—approximately 90% of their portfolio at the time—they wondered when they needed to pull back and become more conservative, if at all.
Because I am not a financial advisor, I don’t give specific advice about investments like whether one mutual fund is better than another. But I manage my own investments, which I highly recommend you do as well if you’re comfortable taking on that responsibility, and I write and occasionally counsel others about applying basic principles and techniques of wise stewardship to their long-term investing strategy.
My first observation was that their overall stock allocation was relatively high, even at their current ages of around 50. I questioned them about that and their risk tolerance. Then, since this couple was about 15 years away from retirement, I suggested they might want to start reducing their stock allocation at approximately five years before retirement, if not sooner, given their fairly aggressive allocation.
The basic principle is to shift your asset allocation away from stocks as you age, having less of your money in higher-risk investments and more in lower-volatility assets like bonds. Most financial experts say you shouldn’t move completely out of equities as you age. They suggest that maintaining some diversification and room to grow with stocks makes sense even after retiring.
When I wrote the original version of this article in 2017, I was getting closer to retirement with my total stock allocation down to around 30 percent, which I admitted was pretty conservative for someone who wasn’t even retired yet. I had always been conservative regarding stocks, never holding more than 60 percent. For me, it was more important to protect what I had worked for and saved rather than betting on the market for potentially higher returns. As Warren Buffett said in one of his famous quotes: “Rule No. 1: Never Lose Money. Rule No. 2: Never Forget Rule No. 1.”
Now, at age 73 with nine years of retirement behind me, I can report that this conservative approach served me extraordinarily well. I retired in late 2016 with about 40% in stocks, further reduced it to 30% by early 2020, and weathered both the March 2020 COVID crash and the 2022 inflation crisis without losing sleep. My stock allocation has since grown back to about 35% through market appreciation rather than additional purchases, and I’m comfortable with that level.
Of course, all investors lose money from time to time, even if it’s only temporary. From a biblical perspective, risk-taking isn’t inherently wrong. Scripture doesn’t condemn the principle of shared risk, prudently taken as with equity in sound businesses, and associated profit-sharing. It seems to encourage putting capital to work and even taking some risks in doing so. This idea shows up prominently in Matthew 25:14-30, the Parable of the Talents.
However, profit is almost always uncertain, and the willingness to take on excessive risk can be based on too much presumption about the future, which can become pure speculation, almost like gambling.
The tendency toward presuming about the future is unusually high during bull markets. In 2017, we had been in a bull market for several years. In 2024-2025, we’ve experienced another extended run of strong returns. We tend to think it will go on forever even when there are danger signs on the horizon. That can be caused by what economic behaviorists call “recency bias”—we look at the most recent evidence, take it too seriously, and expect things will continue that way.
I might simply call it presumption. And as we know, presumption isn’t faith, and it certainly isn’t a wise way to make investing decisions. But one thing we know for sure is that stocks go down. We also know they go up, usually to higher levels than before they went down. But that can take a while.
Consider how far the S&P 500 has tumbled from high to low during different recessionary periods. During major downturns, the S&P 500 has averaged declines of 30-35%. The 2020 COVID crash saw a 34% drop in just weeks before recovering. The 2022 decline was more moderate at 18%, but it came alongside a 13% drop in bonds—the traditional “safe” diversifier—creating a challenging environment for retirees who thought they were properly diversified.
If you’re 64 years old and getting ready to retire with $500,000 and 90% of your investments in an S&P 500 fund, experiencing a 33% loss would mean retiring with $351,500 instead of $500,000. If you initially needed to withdraw 4% annually ($20,000), you would now have to withdraw 5.7% of $351,500 to meet your income goal, further exacerbating the situation.
Of course, given enough time your investments may recover if you hold on and don’t panic and sell as many do. Since 1929, the S&P 500 has averaged a gain of 62% during recovery periods, which can take a year or longer. That’s all well and good, especially if you’re 45 years old instead of 65—you have plenty of time to recover over multiple business cycles. But the impact is dramatically different early in retirement, which is exactly what I want to explain.
Historical market cycles are undeniable and inevitable. When they begin and end and how long they last is what we need to be concerned with if we’re going to be good stewards, especially as we’re getting closer to retirement. Moderation and humility rather than presumption and greed are more important than ever.
What is “sequence of returns risk?”
The topic of stock allocation percentage when one is near or in retirement is a subject of ongoing debate in the investment community. But it has less to do with risk tolerance on an emotional level, although that’s undoubtedly important, and more to do with basic math. Some recommend staying heavily invested in stocks throughout retirement. On the other extreme, some say retirees need to be totally out of the stock market and only invest in “safe” things like Treasury securities, I Bonds, and CDs.
I fall somewhere between, but definitely toward the “safer” end of things. It’s tough to stay ahead of inflation investing only in “safe” fixed-income instruments. On the other hand, being too heavily invested in higher-risk assets like stocks can cause serious problems as we shall see.
You may not be someone who checks what the financial markets do each day. Most financial planners recommend you don’t. However, if you’re getting close to retirement, you may be more tempted to do so. It’s natural, because as you get closer to when you’ll need your retirement savings to live on, the less volatility you can tolerate, especially the downward part.
No one wants to see massive losses in their portfolios, ever. That’s the emotional risk tolerance part. But here’s the math part: a significant loss just before or early in retirement can have severe damaging effects in the long term.
It doesn’t matter if your portfolio is large or small—you’re vulnerable during a specific period, typically considered the five years leading up to and the five years going into retirement. Once you retire, you’ll probably stop contributing to your savings and begin withdrawing from them instead. If you experience significant losses during that time, it can be very hard to recover.
There’s a technical term for this—”sequence risk” or “sequence of returns risk.” It’s the risk that you retire during an unfortunate period of poor returns. It has a “double whammy” effect such that your savings go down in value at the same time you start taking money out. Respected retirement researcher Dr. Wade Pfau explains the risk this way: “In the withdrawal phase of retirement, the specific sequence of market returns matters greatly. Individuals drawing off their investments have no way to manage this risk except to spend at a very conservative rate and hope for the best. More often than not this will require being overly conservative and leaving assets on the table at death.”
Having lived through nine years of retirement, including two significant market disruptions, I can confirm this isn’t just theoretical. The sequence of returns you experience matters enormously, and the protective strategies I discuss later in this article aren’t optional—they’re essential.
How much can sequence risk hurt?
This risk has the greatest impact over long periods. To illustrate, consider this example from MFS: It shows two different 30-year scenarios. Investor A starts with several years of negative returns. Investor B has a string of negative years at the end of retirement. Both start with $250,000 and take out $12,500 in income per year, with the amount increasing at 3% annually to account for inflation. Both investors have a 6.6% average annual return over the 30 years—identical returns, just in a different sequence.
The scenario for Investor B with favorable returns during the early years of retirement, even with some ups and downs, ends up at age 91 with an account balance much larger than the starting amount. Investor A, who experienced poor returns early on, actually ran out of money by age 80.
The main variables are poor returns in the early years—how bad they are, and how many years they persist. The lower the returns and the longer the duration of a market slump in the early years of retirement, the greater the long-term risk. In contrast, a few bad years toward the end of your life may be irrelevant since you’ve probably had enough to live on up to that point, and you’ll likely still outlive your money.
I’ve seen this play out in real time with fellow retirees. Those who retired in early 2022 with 70-80% stock allocations experienced the worst possible timing—stocks down 18%, bonds down 13%, inflation running at 8%, and they were forced to sell depressed assets to fund living expenses. Some panicked and moved entirely to cash, missing the 2023-2024 recovery. Others had adequate cash reserves and spending flexibility, rode it out, and their portfolios recovered. The difference in outcomes, just three years later, is dramatic.
So, what can you do?
When I originally wrote this article in 2017, I was in the “vulnerable” period—five years or less before retirement. I had been thinking about sequence risk even though the stock market wasn’t particularly volatile at that time. My greater concern was a major geopolitical or macroeconomic event that could cause markets to fall precipitously, especially as stocks were at high valuations, then take a long, slow road to recovery. Remember, the risk isn’t a single bad year, which you can usually recover from quickly, but several bad years in a row resulting in major losses early in retirement.
As I noted earlier, I reduced my overall stock allocation before retiring and was under 30% when I stopped working. I’m not necessarily suggesting you do the same—I did what I thought was right for me at my age and circumstances. But if you’re heavy in stocks, you should seriously consider reducing your allocation, especially if you’re in the “high vulnerability zone”—one to five years from retirement.
Understandably, many investors are reluctant to reduce their stock allocation, especially given great returns. In 2017, stocks had delivered strong returns for several years. In 2024-2025, we’re experiencing a similar situation after the recovery from 2022. There’s also concern about bonds—while yields are better now than they were in the 2010s, rising interest rates still cause bond prices to fall, resulting in potential losses, which is exactly what a near-retiree needs to avoid.
Due to the unpredictability of financial markets and the economy in general, there’s no silver bullet. If you’re too conservative with little or no risk, your savings may not grow enough to offset inflation. If you take too much risk, you may experience significant losses at a time when you can least afford them. Retirement planning experts in recent years have begun to suggest that the optimal approach is to reduce your exposure to stocks early in retirement, but then increase your stock allocation as you age. Remember the chart showing the two investors? Losses later in retirement have much less negative impact.
If you’re concerned about sequence risk—and I think you should be aware and plan accordingly—here are ways to reduce it, updated based on my actual experience managing these strategies over nine years of retirement:
Create a cash reserve of at least 18-24 months of living expenses. Think of this as your “sequence of returns risk emergency fund.” The idea is having a source of income you can tap into without selling assets that have significantly declined in value, giving your portfolio time to recover from a large loss. Once you sell assets that have gone down in value, you’re locking in that loss. But if you can let them ride, the probability is high they’ll eventually recover. I maintain this cash in money market funds currently yielding 4.5-4.8%, which provides both safety and reasonable returns while I wait to deploy it. During the 2020 and 2022 downturns, having this cash cushion meant I never had to sell a single share of stocks at depressed prices. That discipline made all the difference in my portfolio’s eventual recovery.
Consider using bonds or bond funds as a way to reduce risk, not just as a source of retirement income. High-quality, short- to intermediate-term bonds, especially U.S. Treasuries and TIPS, can help reduce risk to the bond portion of your portfolio by providing stability during stock market declines. Although they can boost retirement income, higher yield bonds are riskier and tend to be highly correlated with stocks. Therefore, they can experience severe losses during major stock market corrections. The 2022 experience taught many retirees this lesson the hard way—high-yield bonds dropped alongside stocks, failing to provide the diversification benefit people expected. I keep my bond allocation focused on short-term high-quality bonds and TIPS specifically for stability, not yield maximization.
Reduce your allocation to stocks as you get closer to retirement. The general consensus seems to be that a 30 to 50% allocation to stocks may be wise in those first years of retirement. If the market experiences a major downturn, a relatively modest portion of your portfolio will be directly impacted. Many financial planners then recommend you gradually increase your equity exposure over time. If your risk tolerance is very low, or if you have guaranteed income sources such as a pension or annuity, you could reduce exposure to stocks even lower, though I wouldn’t bail out of them altogether—you need growth and some protection against inflation. After nine years of retirement, I’ve learned that my initial 30% stock allocation was perhaps overly conservative during the strong market years, but it was exactly right during 2020 and 2022 when volatility spiked. The sleep-at-night factor has real value.
If you’re invested in a target date fund, verify that the stock allocation is consistent with your risk tolerance. Target date funds are a great way to invest retirement savings, but they’re not all created or managed the same. As you get close to retirement, examine the stock versus bond allocation. If it’s not to your liking, seek out a more conservative fund, or adjust your holdings to lower the overall risk of your portfolio. Many target date funds maintain surprisingly high stock allocations even at the target retirement date—sometimes 50-60%—which may be more risk than you’re comfortable with.
Get some advice if you need it. Although this isn’t an extremely complex issue, many people would do well to seek professional advice. Consider talking with a fee-based financial planner you trust who can assess your individual situation, risk tolerance, and recommend the stock-to-bond ratio and amount of cash reserves that’s right for you. They can also help you with asset allocation adjustments as you age. However, I’ve found that if you’re willing to do some reading and learning, you can manage this yourself quite effectively. The key is having the discipline to stick with your plan during both good and bad markets.
The bottom line from someone who’s lived it
Nine years into retirement, I can tell you that sequence risk isn’t just an academic concept—it’s a real threat that requires real preparation. I’ve watched the market drop 34% in 2020 and another 18% in 2022, and I’ve seen how those drops affected fellow retirees differently based on how they prepared.
Those who had adequate cash reserves, conservative stock allocations entering retirement, and the discipline to avoid panic selling came through fine. Their portfolios recovered and even exceeded previous highs. Those who were heavily in stocks, had minimal cash buffers, and panicked during the downturns suffered permanent damage to their retirement plans.
The strategies I outlined above aren’t theoretical—they’re battle-tested through actual market crises. Having 18-24 months of expenses in cash meant I never worried about selling stocks during either downturn. Maintaining a conservative stock allocation meant my losses were manageable even during the worst moments. And understanding sequence risk intellectually before experiencing it emotionally made all the difference in my ability to stay calm and stick to my plan.
If you’re within five years of retirement, this is the time to get serious about protecting yourself from sequence risk. The market might continue climbing for years, or it might crash tomorrow—you simply don’t know. What you do know is that if you experience poor returns early in retirement, the damage can be irreversible. Take the steps now to protect yourself, even if it means sacrificing some potential upside.
Your future retired self will thank you.
How much can sequence risk hurt?
This risk has the greatest impact over long periods. To illustrate, consider this example from MFS:
The chart shows two different 30-year scenarios. The solid red line is for Investor A who started off with several years of negative returns. The dotted teal line is for Investor B who had a string of negative years at the end of retirement. Both started with $250,000 and both took out $12,500 per year of income, increasing at 3% a year for inflation. In this example, both investors had a 6.6% average annual rate of return (which may be a little optimistic) on their investments for the 30-year period.
As you can see, the scenario for Investor B with favorable returns during the early years of retirement, even though there were still some ups and downs, ended up at age 91 with a much larger account balance larger than what it started with. Investor A, who experienced poor returns early on, actually ran out of money by age 80.
The main variables are poor returns in the early years – how bad they are, and how many years. The lower returns and/or the longer the duration of a market slump in the early years of retirement, the greater the risk in the long term. In contrast, a few bad years toward the end of your life may be irrelevant since you have probably had enough to live on up to that point, and you will probably still outlive your money.