This article is part of the RFLE series. It was initially published on September 7, 2022, and updated in March of 2026.
When I initially wrote this article in September 2022, we were in the midst of what appeared to be an economic crisis. Inflation was running at 8-9%, the Fed was aggressively raising interest rates, stocks had fallen more than 20% from their 2021 peaks, bonds were getting hammered, and retirees who had just left the workforce in 2021 or early 2022 were experiencing exactly the sequence-of-returns nightmare this article describes.
Four years later, I can report what happened next, and it provides a real-world case study in both the dangers of sequence risk and the importance of not panicking.
By late 2023, markets had recovered most of their 2022 losses. By 2024, major indices will hit new highs. Those retirees who retired in 2021-2022 did so at what appeared to be the worst possible time. Many of them are fine now if they didn’t panic and sell everything, had adequate cash reserves to avoid selling stocks at the bottom, and were able to reduce spending temporarily during the downturn.
But some weren’t as fine. Those who had to sell stocks in 2022 to fund living expenses locked in those losses. Those who panicked and moved entirely to cash “until things settled down” missed the entire 2023-2024 recovery.
The lesson? Sequence risk is real and dangerous, but manageable if you prepare for it. The mitigation strategies I outlined in 2022 work, but only if you actually implement them before the crisis hits, not during it.
Looking back, I’m grateful I had already shifted to a more conservative allocation (40% stocks, 60% bonds) before the 2022 downturn. I’m even more thankful I had 18 months of expenses in cash, which meant I never had to touch my stock holdings during the worst of it.
Because both stocks and bonds were down, I was affected like everyone else, but not as severely as if I had a higher percentage in stocks and no cash reserve I could draw on for living expenses.
I have written about the significant changes in the U.S. and global economies and their impact on retirement portfolios. In 2022, we were experiencing what seemed like epochal economic shifts—the Federal Reserve pivoting from quantitative easing to quantitative tightening, inflation spiking to levels not seen in 40 years, and both stocks and bonds declining simultaneously in a way that violated the traditional diversification playbook.
These changes weren’t all bad. Many economists argued that it was healthy for the Federal Reserve to adopt a less interventionist role after years of keeping interest rates artificially low. It was probably necessary for interest rates to rise to more normal levels. But the transition was painful for everyone: inflation drove up prices for gas, food, and housing; stock and bond market volatility affected savers and retirees alike; and higher interest rates made credit cards, auto loans, and mortgages much more expensive.
This was all occurring as the economy was still recovering from the debilitating effects of the COVID pandemic, which had shut down large portions of the economy in 2020 and disrupted supply chains for years afterward.
These changes forced many of us to adjust our lifestyles, investment strategies, and economic expectations. Young families with low incomes were disproportionately affected. But retirees who relied on their savings for a significant portion of their retirement income—people like me—were especially vulnerable.
In an article I wrote that summer, I explored whether 2022 was a good time to retire given the challenging economic climate. Whether to retire during such turbulent times was difficult enough. Many people understandably decided to delay retirement.
But what if you had recently retired? What if you left your job in late 2021 or early 2022, perhaps at the peak of the stock market, before the downturn began? One of the groups hardest hit by the 2022 market decline was retirees, owing to the “sequence of returns risk.”
I had written about this concept before, but in 2022, we were living through it in real time. This article examines in greater depth what sequence risk is, why it matters, and, most importantly, how you can protect yourself against it.
What sequence of returns risk is
“Sequence of returns risk” (often abbreviated SRR) is a sophisticated-sounding description of a relatively straightforward concept: It’s the risk of experiencing lower or negative investment returns early in retirement while you’re simultaneously withdrawing money to live on.
In other words, it’s a “double whammy” effect where you’re taking money out of your portfolio while it’s declining in value, thereby accelerating its losses. You’re selling assets at depressed prices to fund your living expenses, which permanently reduces the number of shares you own. When markets eventually recover, you have fewer shares participating in that recovery, which means you never fully catch up to where you would have been if the downturn had happened later in retirement.
I can now confirm from personal experience that this isn’t just theoretical. In 2022, my portfolio declined by approximately 18%, and I withdrew roughly 3.5% to supplement my Social Security and cover expenses. That meant my portfolio ended the year down about 21.5% from where it started—the combination of market losses and withdrawals.
Had I been forced to continue withdrawing at that rate through 2023 and 2024 while markets remained down, the damage would have been even greater. However, because I had adequate cash reserves, I was able to draw on them rather than sell depressed stocks.
By 2024, my portfolio had recovered and exceeded its 2021 peak. But that recovery was only possible because I didn’t have to sell stocks at the worst possible moment. That’s the essence of managing sequence risk—not avoiding downturns (which is impossible), but avoiding being forced to sell during them.
It’s not the short-term losses that matter most, though they can certainly be psychologically painful. It’s the long-term effects of those losses, combined with ongoing withdrawals, that pose the real danger. Once you’ve sold assets at low prices to fund spending, you can’t reclaim those assets. They’re gone, along with all the future growth they would have generated.
In 2022, we were in a down market and experiencing its effects in real time. But we didn’t know how the year would end, or how 2023 would perform. We didn’t know how much sequence risk the Fed’s policies would ultimately create—only time would tell.
Generally speaking, retiring during a bear market, when stocks are at lower valuations, is better at avoiding sequence risk than retiring near the top of a bull market, when stocks are overvalued or highly priced. Why? Because if you retire during a period of low valuations, there’s a better chance they’ll increase in the future. If stocks are overpriced when you retire, there’s a greater chance they’ll decline, potentially significantly.
This is precisely the situation many 2021-2022 retirees faced; they retired after a decade-long bull market that had pushed valuations to historically high levels, just in time for a significant correction.
How sequence risk does damage
Let me illustrate how sequence risk damages a portfolio. Suppose that, just as you retire, you withdraw 4% annually from your portfolio, and in that first year the market declines by 20%. Your portfolio will be down 24% by year-end, depending on when during the year you took your withdrawals.
If you were selling assets—stocks and bonds—to fund those withdrawals, you now have 24% fewer assets to generate growth and income in the future. Another year or two of similarly poor returns, combined with continued 4% withdrawals, compounds the problem dramatically. You’re essentially in a hole that becomes increasingly difficult to climb out of.
When I wrote about whether 2022 was a good time to retire, many people probably thought, “What a ridiculous question—this is obviously the worst time to retire.” And there was wisdom in that reluctance. All things considered, retiring into a declining market while inflation was spiking wasn’t ideal.
But sequence risk is a genuine threat even if your current financial condition looks reasonably good, and especially if we enter a prolonged recession or extended bear market. Prolonged poor annual market returns early in a retirement can cause severe problems. But damage can also occur quickly, as we saw in 2008 when a single year of extreme losses devastated many retirement portfolios.
It’s worth noting that 2022, while painful, wasn’t nearly as severe as 2008. The 2008 financial crisis saw stocks fall more than 50% from peak to trough. That’s more than twice the decline we experienced in 2022. Retirees who lived through 2008 and managed to survive without depleting their portfolios learned crucial lessons about cash reserves, spending flexibility, and the importance of not panicking.
Those lessons proved valuable again in 2022. Many retirees who had lived through the 2008 financial crisis were better prepared the second time around. They had larger cash buffers, more conservative allocations, and more realistic expectations about market volatility. Those who retired after 2008 but didn’t learn those lessons—or who forgot them during the long bull market of 2010-2021—may have struggled more in 2022.
Sequence risk typically remains relatively low during normal market conditions. However, during major economic upheavals—such as 2008 or 2022—it emerges suddenly and intensely, often catching unprepared retirees off guard.
Part of a bigger picture
Although a sequence of negative returns can have adverse effects, it’s essential to recognize that it’s only one determinant of premature portfolio depletion. Sequence risk is part of the broader picture of retirement sustainability, which encompasses multiple interacting factors.
Many other things affect whether your portfolio will last as long as you do: your life expectancy, the actual market returns themselves (not just their sequence), the volatility of those returns, how much you choose to spend periodically, how flexible you’re willing to be with your spending when conditions deteriorate, the tax efficiency of your withdrawals, your healthcare costs, and the starting value of your portfolio relative to your spending needs.
The simplest way to explain how all these factors work together is this: The smaller your starting savings balance, the longer you live, and the more you spend, the more you depend on favorable market returns (and less volatile ones) to maintain your portfolio’s sustainability. And critically, some of these factors have a much greater impact than others.
Aging is perhaps the most critical variable because it affects all other variables. All of the risks to our portfolios increase as we age. Most importantly, aging affects both our remaining life expectancy and the size of our portfolio—the longer we live, the more years we must fund from a portfolio that’s been supporting us all along.
Therefore, the size of your portfolio relative to your spending needs, combined with your life expectancy at any given point, is the most critical factor—even more important than market volatility or sequence risk. We don’t know (and probably can’t say with certainty) how much money will remain in our retirement accounts in 10 or 20 years, or whether we’ll even live that long.
Sequence risk and longevity risk
“Sequence risk” further complicates an already uncertain picture, given the many variables, when we periodically withdraw funds from a volatile portfolio of stocks and bonds. “Longevity risk” is simply the risk that you outlive your savings—that you live longer than your money lasts.
Sequence risk and longevity risk are intimately connected. The longer you live, the more damaging the effects of an unfavorable sequence of returns can be. Why? Because sequence risk means you’re removing assets from your portfolio before those assets have a chance to participate in future growth. To use an imperfect metaphor, you’re taking chips off the table before you’ve had a chance to play most of the game.
Let me illustrate with a detailed example showing how the sequence-of-returns risk works over long periods. This chart shows two identical hypothetical retirees—same age, same starting portfolio balance, same withdrawal strategy—with one crucial difference: Retiree #1 retires at age 66 during a bull market with positive returns early on. In contrast, Retiree #2 retires at the same age during a bear market with negative returns early on.
Chart 1: Fixed Withdrawal Strategy – Contrasting Sequences
In this scenario, both retirees start with $500,000, withdraw $20,000 annually, and experience identical returns—just in reverse order. Their average annual return after 15 years is similar at 4%. But look at the dramatic difference in outcomes:
Retiree #1, who enjoyed positive returns early in retirement, has approximately $525,000 remaining at age 80. Retiree #2, who suffered negative returns early, has only about $262,000 remaining—roughly 50% less than Retiree #1, despite identical average returns over the same time period.
This outcome occurred even though there were only five negative-return years out of fifteen in this example, and those negative years were not catastrophic (ranging from -5% to -15% annually, not the -50% we saw in 2008).
A critical factor that exacerbated Retiree #2’s situation was the maintenance of a fixed annual withdrawal of $20,000, regardless of the portfolio balance. That equated to 3.8% of the portfolio in year one—a reasonable starting withdrawal rate. However, by year 6, the same $20,000 withdrawal represented more than 7% of the remaining portfolio, and it remained in that dangerously high range through age 80.
Hopefully, most people wouldn’t automatically maintain such a high withdrawal rate from a portfolio that has lost half its value over six years. However, many retirees do precisely this—they maintain fixed-dollar withdrawals adjusted for inflation regardless of portfolio performance, and that inflexibility can be devastating.
This example might seem alarming, especially if you’re in the fixed-annual-withdrawal camp. As the data show, five or six years of down-market returns while you’re withdrawing the same amount each year can severely damage long-term portfolio sustainability.
But take heart—such scenarios, while not rare, are also not inevitable. Most bear markets last two to three years, not five or six. And most people, when confronted with a declining portfolio, will adjust their withdrawal strategy to compensate. When they do, it can significantly mitigate sequence risk.
Take a look at another example using the same two retirees and the same sequence of returns, but with one significant difference: Instead of taking fixed annual withdrawals of $20,000, they use a percentage-based withdrawal strategy similar to the Required Minimum Distribution (RMD) percentage that the IRS mandates for traditional IRAs. This approach begins with a modest percentage at age 66 and increases annually according to IRS life expectancy tables.
Chart 2: Percentage-Based Withdrawal Strategy
In this scenario, the withdrawal amount adjusts annually based on the prior year-end balance, using the applicable RMD percentage. This means withdrawals automatically decrease when the portfolio underperforms and increase when it outperforms.
As you can see, despite the bear market that Retiree #2 had to weather early in retirement, their account balance at the end of 15 years ($465,000) is remarkably close to Retiree #1’s balance ($485,000). That’s a much better outcome than the fixed-withdrawal scenario, in which Retiree #2 had only half as much money remaining.
But the news isn’t entirely good. Look at each retiree’s income at age 80 (year 15). Retiree #1 is withdrawing $39,275 based on their healthy portfolio balance. Retiree #2 is withdrawing only $22,892—about 42% less income despite having a portfolio balance that’s only about 4% smaller.
This illustrates a significant trade-off: Percentage-based withdrawals protect portfolio longevity but create significant income variability. Retiree #2’s income at age 75 was only $14,043, which might be substantially less than needed to maintain a reasonable standard of living.
Because of positive returns in subsequent years, Retiree #2 will gradually recoup some of the lost ground. Still, she’ll never fully catch up to Retiree #1 in terms of either account balance or annual withdrawal amounts. The early sequence of poor returns has permanently reduced her lifetime income trajectory.
If Retiree #2 needs to withdraw more than the RMD percentage to fund essential living expenses, the situation becomes more problematic. Let me show you what happens if Retiree #2 must withdraw $15,000 annually (slightly more than the RMD would provide), adjusted by 3% per year for inflation to maintain purchasing power.
Chart 3: Higher Withdrawals with Poor Early Sequence
In this case, Retiree #2’s income at age 80 is $22,689—higher than it was under strict RMD percentages but still well below Retiree #1’s income level. Her withdrawal rate at that age is relatively high relative to her remaining portfolio balance.
Her account balance at age 80 is $356,000—about 71% of her original $500,000 starting balance. That’s not terrible, especially considering she weathered a severe early-retirement bear market. But it’s significantly less than the $465,000 she would have had if she’d stuck strictly to RMD percentages, and dramatically less than the $525,000 that Retiree #1 has after enjoying a favorable sequence of returns.
In all three scenarios for Retiree #2, the damaging effects of sequence risk are clearly demonstrated. However, the impact can be mitigated somewhat through flexible spending approaches, though the cost is either reduced income or reduced remaining portfolio balance—and often both.
Mitigating strategies
We conclude from these examples that sequence-of-returns risk is a genuine threat to the long-term sustainability of market-sensitive retirement portfolios. The highest “cost” of sequence risk is the permanent loss of capital and all the future compounded returns that capital would have generated.
The situation is further exacerbated when you spend from your portfolio by selling assets during a declining market. You lose not only the money you spend but also all the potential future compounded gains on the assets you sold. It’s a double penalty that can never be fully recovered.
Another contributing factor is the size of your periodic spending. Withdrawals that are too large relative to portfolio size—especially during down markets—can accelerate portfolio depletion. While losing 100% of a retirement portfolio solely due to sequence risk is highly unlikely, even with reasonable spending, an extremely poor sequence of returns combined with inflexible, unsustainable spending could indeed lead to premature portfolio destruction.
Because we have no control over the sequence of returns we’ll receive, and we cannot predict future sequences with any accuracy, we can only implement strategies to mitigate the effects of sequence risk.
Here are the most effective approaches:
1. Adjust Your Spending
Variable spending strategies—especially reducing spending when portfolio values decline—won’t eliminate sequence risk. But they can dramatically lower the probability of premature portfolio depletion by preventing you from unwisely spending fixed amounts annually even as your savings dwindle.
The challenge with variable spending is that you may struggle to maintain your accustomed standard of living. When your “safe” variable spending drops below your non-discretionary expenses for an extended period, you still have to buy food, pay utility bills, and cover Medicare premiums—even if continuing to do so pushes you into “unsafe” withdrawal territory.
The key is distinguishing between truly non-discretionary expenses and habitual spending that feels non-discretionary but actually isn’t. Most retirees discover they have more flexibility than they initially believed once they seriously examine their spending.
2. Adjust your asset allocation
Another way to mitigate sequence risk is to adjust your stock-to-bond allocation, reducing equity exposure and adding less-volatile bonds. This approach protects against stock market declines, though it doesn’t protect against rising interest rates or inflation (as 2022 demonstrated when both stocks and bonds declined simultaneously—a historically rare occurrence).
Before I retired, I shifted from a 60%/40% stock/bond allocation to a 40%/60 % allocation. This more conservative allocation resulted in somewhat smaller losses in 2022 than those experienced by retirees with more aggressive portfolios. The trade-off is that I’ve had slightly lower returns during bull markets. But for my risk tolerance and sleep-at-night factor, it’s been the right choice.
The appropriate allocation depends on your age, risk tolerance, income sources, spending flexibility, and the size of your portfolio relative to your needs. There’s no one-size-fits-all answer, but generally speaking, the more you depend on portfolio withdrawals to fund essential (not discretionary) expenses, the more conservative your allocation should be.
3. Pursue a “safety first” strategy
Another option is to pursue a “safety first” strategy, which relies on guaranteed income sources such as Single Premium Immediate Annuities (SPIAs), deferred income annuities, or Treasury Inflation-Protected Securities (TIPS) bond ladders to provide income that’s not subject to market risk.
The concept is to ensure that your essential expenses—housing, utilities, food, healthcare, insurance—are covered by guaranteed income sources: Social Security, pensions if you have them, and annuities or TIPS ladders you purchase. Only your discretionary spending is allocated to your market-sensitive portfolio.
This approach can be particularly valuable if you experienced poor early returns and are concerned about longevity risk. By annuitizing a portion of your remaining portfolio, you create a guaranteed income floor that will last as long as you do, regardless of what markets do going forward.
I explored this strategy in detail in a previous article about what to do if you’re already in retirement with inadequate income. While I haven’t personally annuitized any of my portfolio yet, I’m considering it more seriously now as I approach my mid-70s.
4. Maintain a cash buffer
One of the most effective ways to mitigate sequence risk is to maintain a substantial cash buffer—typically 12 to 24 months of living expenses—that you can draw on during market downturns. This prevents you from having to sell depreciated assets to fund your spending, allowing your stock holdings to recover when markets eventually rebound.
I discussed this strategy in detail in a 2020 article about the coronavirus pandemic and the cash bucket strategy. Having that cash buffer was crucial during the 2022 downturn—I was able to avoid selling any stocks during the worst of the decline, drawing instead from my cash reserves.
Key takeaways
Most people focus on the potential returns of their retirement portfolios, whether oriented mainly toward growth, income, or some combination. They ask, “What return can I expect?” or “How should I allocate my assets to maximize returns?”
But in reality, the sequence of those returns matters far more than average returns over any given period. This is why I used identical average annual returns in all the examples above—to demonstrate that sequence, not just the average, determines outcomes.
For retirement portfolios to remain sustainable over 25-30 years or more, we need a favorable sequence of returns more than extraordinarily high average returns. A 6% average return with poor sequencing can be worse than a 5% average return with favorable sequencing.
Fortunately, as we’ve seen, there are concrete steps we can take to mitigate sequence risk. It never disappears entirely, but it can become relatively manageable if your wealth becomes very large relative to your spending needs and remaining life expectancy, or if your portfolio performs reasonably well throughout retirement. Conversely, sequence risk can become quite severe under opposite circumstances—modest wealth relative to needs, extended poor returns, and inflexible spending.
The key takeaways are:
First, the sequence of returns your retirement portfolio experiences is a significant determinant of portfolio sustainability. It’s not the only factor, but it’s among the most important and among the least directly controllable.
Second, the most crucial underlying factor is the duration of retirement, which is directly related to life expectancy and longevity risk. The longer your retirement, the more years you must fund, and the more opportunities for unfavorable sequences to occur.
Third, none of these factors is predictable for any individual or couple. We don’t know what returns we’ll experience, when we’ll experience them, or how long we’ll live. All retirement planning occurs under conditions of genuine uncertainty.
For these reasons, we take all reasonable measures to mitigate known risks. Proverbs 27:12 tells us, “The prudent see danger and take refuge, but the simple keep going and pay the penalty.” Taking refuge from sequence risk means building cash buffers, maintaining spending flexibility, choosing appropriate asset allocations, and being willing to adjust when conditions warrant.
But we also hold our assets loosely, avoiding anxiety and fear, knowing that ultimately everything belongs to God. In His sovereignty, He has chosen to give resources to us to manage on His behalf (Matthew 25:14-30). We’re stewards, not owners. That perspective helps us plan diligently without falling into the anxiety that can come from feeling solely responsible for outcomes we cannot control.
Finally, we must place our ultimate trust in our heavenly Father who loves us and has promised to help and care for us. Isaiah 41:13 assures us: “For I, the LORD your God, hold your right hand; it is I who say to you, ‘Fear not, I am the one who helps you.'”