Sequence of Returns Risk: Why the 10 Years Around Retirement Matter More Than Your Average Return

Most retirement planning conversations eventually come back to one question: do you have enough? And the answer almost always depends on some version of projected average returns such as, if your portfolio earns X percent per year, you withdraw Y percent annually, and the math holds.

That framing is useful but incomplete in a way that matters a great deal if you're within 10 years of retirement. Average return doesn't tell you what you actually need to know, because two portfolios can earn the same average return over 20 years and end up in completely different places. What separates them isn't luck, exactly. It's the order in which gains and losses arrive.

This is what researchers call sequence of returns risk. It's not an obscure academic concept. It's one of the most practical things to understand if you're approaching or entering retirement, and it's not discussed nearly enough in mainstream financial planning conversations.

The retirement risk zone — and why this window is different from the ones before it

During the accumulation phase of your life, time is your biggest advantage. You're working, adding to your accounts, and not drawing them down. If the market drops 25% when you're 40, it's painful on paper. But you haven't sold anything. You're still contributing. And if you hold on, history suggests you'll recover.

The window around retirement doesn't work the same way. Researchers and financial planners increasingly use the term "retirement risk zone" to describe a specific 10-year period: the five years before you stop working and the five years after. During this window, your portfolio is typically at its largest, you're either approaching or transitioning away from income from work, and you're beginning to draw it down rather than build it up.

That combination changes the math entirely. A market downturn during this window isn't just a paper loss you wait out. It forces you to sell real assets to cover real expenses at depressed prices. And the shares you sell during a decline aren't there when the market recovers.

The size of your portfolio matters here, too. A 20% decline on a $250,000 portfolio costs you $50,000. The same 20% decline on a $1,000,000 portfolio costs you $200,000. The higher the balance when you enter this window, the higher the stakes.

Morningstar's 2026 retirement income research puts the base-case safe withdrawal rate at 3.9% for portfolios with 30 to 50 percent in equities⁽¹⁾, which is up from 3.7% last year, but still well below the 4% figure many people carry as a working rule. The reason it's not higher has less to do with average expected returns and more to do with the risk of what happens when poor returns arrive at the wrong time.

Why early losses hurt more than late losses

When you're drawing money from a portfolio, the timing of losses and gains affects your outcome in a way that simply doesn't apply when you're not withdrawing.

Here's the core mechanic. Suppose you need $4,000 per month from your portfolio to cover expenses. When your portfolio is performing well and values are up, selling investments to raise that $4,000 costs you a relatively small number of shares. When your portfolio drops 20%, raising that same $4,000 costs you significantly more shares, because each share is worth less.

Those extra shares you had to sell don't come back when the market recovers. The recovery lifts the value of the shares you still hold. But the shares you already sold to cover expenses are gone. This is what makes early retirement losses structurally different from losses in the middle of a long career. During accumulation, volatility averages out over time. During drawdown, the order in which volatility arrives has a permanent effect on your portfolio's trajectory.

A late-retirement loss, let’s say in year 15 or 16 of a 25-year retirement, operates differently. By that point, your portfolio may not need to sustain you for as many years. Because the portfolio has had years of previous growth, a late market dip inflicts a much smaller percentage drag on a nest egg that has already fulfilled most of its historical mission. The math is still painful, but it's far more forgiving.

The Schwab example: same average, different sequence, very different outcome

The Schwab Center for Financial Research published a clear illustration of this in January 2026 that puts real numbers to the concept⁽²⁾.

Consider two investors who each start retirement with a $1 million portfolio. Both take an initial annual withdrawal of $50,000, which they increase by 2% each year to account for inflation. Both experience a 15% decline in portfolio value. The same loss, the same magnitude.

The only difference is timing. Investor One faces a 15% decline in the first two years of retirement. Investor Two faces it in years 10 and 11.

Same average return. Same withdrawal rate. Same magnitude of loss. The sequence is the variable that determines which investor still has a portfolio and which doesn't.

That's not a hypothetical designed to scare you. It's a clean illustration of a mechanical reality that applies to any portfolio being drawn down during a market decline.

The recovery problem: why getting back is harder than it sounds

A natural response to an early retirement decline is: "I'll just wait for the market to recover." That logic works during accumulation. During drawdown, it runs into a compounding headwind.

Schwab's research models what happens to recovery timelines based on withdrawal rates⁽²⁾. Start with a $1 million portfolio that hits a 15% decline in years one and two. Then look at what it takes to get back to your original starting balance if the market rebounds to a steady 6% annual return.

At a 4% withdrawal rate, full recovery from an early 15% decline would require 28 consecutive years of 6% annual gains. At a 2% withdrawal rate, recovery takes 11.5 years of the same 6% gains. (This assumes withdrawals are adjusted annually for inflation, compounding the strain on the portfolio.)

This is why withdrawal rate matters so much in the early years of retirement, and why flexibility in spending is one of the most powerful tools available during a market downturn. A modest reduction in withdrawals during a bad stretch doesn't just preserve capital, it dramatically shortens the recovery timeline.

Not everyone has that flexibility, which is exactly why building it in before retirement starts is worth the effort.

Three strategies that actually reduce the risk

1. Build a cash reserve before you need it

The most straightforward protection against sequence risk is having a buffer of liquid, low-risk assets you can draw on during a market decline, so you don't have to sell equities at depressed prices.

Schwab recommends maintaining roughly one year of expenses in cash investments, plus an additional two to four years in high-quality short-term bonds or short-term bond funds⁽²⁾. Together, that buffer gives a new retiree three to five years of living expenses in assets that aren't subject to stock market volatility. When equities drop, you draw from cash and bonds rather than selling stocks. You give the equity portion of your portfolio time to recover before you need to touch it.

This approach doesn't require perfect timing or a prediction about when markets will fall. It's a structural hedge that you build in advance, before you need it. You can find a financial checklist every adult should have here.

2. Use a bucket strategy to match assets to time horizons

A bucket strategy takes the cash reserve concept further by dividing your retirement assets into separate pools based on when you'll need to access them.

In a common three-bucket structure, Bucket One covers roughly the next zero to five years: it holds cash, CDs, and money market funds. It's entirely liquid and low-risk. Bucket Two covers years six through ten: it holds bonds and income-focused investments. Bucket Three covers year 11 and beyond: it's focused on growth through globally diversified equities.

The practical benefit of this structure is behavioral as much as financial. When markets decline in a given year, you're drawing from Bucket One, which is not in stocks and hasn't declined. The growth assets in Bucket Three have five to 10 years to recover before you need to access them. You're not forced to sell anything at a depressed price because you never needed to sell from the declining portion in the first place.

Schwab notes that the psychological benefit is real as well⁽³⁾. Knowing which bucket covers which period can make it easier to tolerate short-term market volatility without making reactive decisions that compound the damage.

3. Consider delaying Social Security to reduce portfolio dependence

Social Security is, in a real sense, the most inflation-protected, longevity-proof income stream available to most retirees. And claiming it strategically can do meaningful work in reducing how hard your portfolio has to work during the early retirement years.

The benefit structure is straightforward. Claiming at 62 reduces your monthly benefit by up to 30% compared to your full retirement age⁽⁴⁾. For every year you delay past your full retirement age, your benefit grows by 8% per year, up to age 70⁽⁵⁾.

For someone with a large enough portfolio to bridge the gap, delaying Social Security past 62 or even past full retirement age reduces the portfolio withdrawal rate during the critical early years. Fewer withdrawals during the retirement risk zone means less exposure to sequence risk during the period when it's most damaging. The tradeoff is that you're drawing from your portfolio earlier rather than from Social Security, so the math on whether to delay depends on your health, your other income, and your portfolio balance. But for people who have the assets to bridge the gap, delaying often reduces long-term sequence risk even as it depletes short-term portfolio balance.

Common mistakes people make when thinking about this risk

Treating average return as the whole story. Average return is important, but it tells you nothing about timing. A portfolio that earns -20%, +30%, +10%, +8%, +12% over five years produces a completely different outcome for someone withdrawing annually than one that earns +12%, +10%, +8%, +30%, -20%. Even though both sequences produce the exact same average return without withdrawals. The order matters.

Waiting until retirement to build the cash buffer. The time to build your near-term cash reserve is before the transition, not during it. If you enter retirement fully invested in equities and a market decline hits in the first year, you don't have the option to retroactively create the buffer, you're already selling depressed assets. Building the buffer in the two to three years before retirement gives you protection without the reactive decision-making.

Assuming flexibility you don't yet have. Cutting withdrawals during a market decline is one of the most effective tools available. But it only works if your fixed expenses are genuinely lower than your withdrawal rate. If your mortgage, healthcare costs, and basic living expenses already consume most of your planned withdrawal, there's no room to scale back when markets fall. Building flexibility into your withdrawal plan before retirement starts either through expense reduction or income diversification, is worth more than any tactical adjustment after the fact.

Key takeaways

• Sequence of returns risk is the risk that the order, not just the average, of investment returns permanently affects how long your portfolio lasts.
• Two portfolios with identical 20-year average returns can produce very different outcomes if one experiences major losses early in the drawdown phase rather than late.
• Per Schwab's analysis, a 15% annual decline for two consecutive years early in retirement (years 1-2) can deplete a $1M portfolio years earlier than the same downturn occurring in years 10-11.
• A 4% inflation-adjusted withdrawal rate after an early decline may require 28 straight years of 6% gains to fully recover; dropping to a 2% withdrawal rate shortens recovery to 11.5 years.
• Three proven approaches to managing this risk: a cash buffer of three to five years of expenses, a bucket strategy that separates assets by time horizon, and strategic Social Security timing to reduce early portfolio dependence.

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Greensprout's editorial team writes on behalf of the reader. Our goal is to provide clear, useful information to help you make better financial decisions. Our editorial content is not influenced by advertiser relationships.

Nothing on this site constitutes investment advice. All investors are encouraged to conduct their own research before making any investment decision. Past performance is not a guarantee of future results. Investing involves risk, including the possible loss of principal.

Schwab Center for Financial Research data referenced as of January 2026. Morningstar withdrawal rate data as of 2026. Social Security benefit figures per SSA.gov.

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