RETIREMENT INCOME BASICS
Sequence-of-Returns Risk in Retirement
Sequence-of-returns risk is the risk that the order of investment gains and losses, combined with withdrawals, leaves less money available for the rest of retirement. Losses early in retirement can be especially difficult because withdrawals reduce the assets left to participate in a later recovery.
This guide explains the arithmetic, why an average return does not tell the whole story, and the questions to consider when connecting investments with spending and other income.
Educational guide | Hypothetical illustration | Sources verified October 1, 2026
AT A GLANCE
01
The same set of returns can produce different ending balances when money is withdrawn along the way.
02
The amount and timing of withdrawals matter, along with market returns. A later gain applies to the assets still invested.
03
Spending flexibility, available reserves and other income sources are useful planning questions. Each choice has tradeoffs; no strategy removes investment risk.
What changes when you start taking withdrawals?
While you are working, new savings may continue flowing into your accounts. In retirement, the direction often reverses: your investments help pay the bills.
A market decline reduces the value of the portfolio. A withdrawal removes additional money. If investments must be sold at lower prices to raise a fixed dollar amount, more shares may need to be sold, leaving fewer shares invested.
This is why a market recovery and a recovery in your own account balance are different things. Money that has been withdrawn no longer participates in subsequent returns. Contributions can also make return order matter during the saving years.
Source: Fidelity explanation of return timing and retirement withdrawals.
How can the same returns produce different results?
Consider two hypothetical portfolios, each starting with $1,000,000. Each withdraws $50,000 at the beginning of each year, then earns that year’s return on the remaining balance. One experiences a 20% loss followed by a 25% gain; the other experiences those returns in reverse order.
Hypothetical only. A $50,000 withdrawal occurs at the beginning of each year, before the stated return. No contributions, taxes, fees or inflation adjustments are included.
Loss first
-20% → +25%
Year 2 ending balance, after withdrawal and return
$887,500
Gain first
+25% → -20%
Year 2 ending balance, after withdrawal and return
$910,000
$22,500 difference
| Two-year illustration | Loss first | Gain first |
|---|---|---|
| Starting balance | $1,000,000 | $1,000,000 |
| Year 1 return | -20% | +25% |
| Year 1 ending balance, after withdrawal and return | $760,000 | $1,187,500 |
| Year 2 return | +25% | -20% |
| Year 2 ending balance, after withdrawal and return | $887,500 | $910,000 |
Both portfolios paid out $100,000 over two years, but the loss-first portfolio ends with $22,500 less. Without withdrawals or contributions, both would finish at $1,000,000: a 20% loss and a 25% gain offset each other when compounded, regardless of order.
The difference comes from applying returns to different balances after money has been removed. The illustration isolates that effect; it does not estimate how long either portfolio would support retirement.
These assumed returns and withdrawals are selected to demonstrate arithmetic. They are not actual investment performance, a forecast, or a recommended withdrawal amount. Real returns and cash flows vary; taxes, fees and inflation would change the results.
Why do losses early in retirement deserve attention?
An early decline can leave a smaller portfolio to fund many future years. If withdrawals continue unchanged, they represent a larger share of the remaining assets. Later gains may help, but they do not restore money already spent.
The concern depends on how much of your spending comes from the portfolio, how long withdrawals may continue, and whether spending can change. A household with substantial pension income may face a different funding gap from one relying primarily on investments.
There is no fixed date after which this risk disappears. Losses later in retirement can also matter, especially when expenses rise or withdrawals remain large. Planning around a single average return can miss these differences.
Source: FINRA considerations for managing a retirement portfolio.
What choices are useful to review before a downturn?
A plan can identify possible adjustments before markets become stressful. The useful question is how a choice changes the household’s cash flow and risks, rather than whether it makes losses impossible.
Spending flexibility
Which discretionary expenses could be reduced or postponed? Lower withdrawals leave more money invested, but essential costs and unexpected expenses may limit flexibility.
Accessible reserves
What money is available for near-term expenses, and how would it be replenished? Reserves can reduce the immediate need to sell other investments, but they can run down. Holding more cash also creates a tradeoff with long-term growth and purchasing power.
Investment mix
How do stocks, bonds and cash fit your withdrawal needs, time horizon and tolerance for loss? Diversification spreads exposure, but investments can decline together. Bonds also carry risks; moving entirely to cash introduces inflation and growth concerns.
Sources: FINRA retirement portfolio guidance and SEC Investor.gov asset allocation and diversification.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Asset allocation programs do not assure a profit or protect against loss in declining markets. No program can guarantee that any objective or goal will be achieved.
How do other income and taxes affect the withdrawal plan?
Social Security, pension payments and employment income can change how much spending needs to come from investments. Their starting dates matter. Delaying an income source may mean drawing more from the portfolio in the meantime, so income timing and portfolio withdrawals need to be considered together.
The amount withdrawn and the amount available to spend can differ because of taxes. The account type and your federal and state tax circumstances affect the result. For New Jersey households, state tax treatment belongs in that review alongside federal rules.
If required minimum distributions apply, lower discretionary spending does not remove that obligation. An RMD is an account distribution requirement, not a requirement to spend the money. Funds not needed for expenses or taxes can remain available outside the retirement account.
Specific individualized tax advice not provided. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Sources: SSA retirement planning considerations and IRS required minimum distributions.
What information helps put this risk in context?
A useful starting point is a household income and spending picture, rather than a prediction about the next market decline.
- Regular expenses, discretionary spending and larger planned purchases.
- Current account balances, investment holdings and accessible reserves.
- Social Security estimates, pension options and expected work income.
- Recent tax returns and any required-distribution information.
- What could change if markets fell early, expenses rose or retirement lasted longer than expected.
At Retirement Refined, we connect retirement income planning with investments and tax considerations. Reviewing different scenarios helps frame the decisions; it does not predict markets or establish a guaranteed outcome.
Explore our Retirement Income Planning and Investment Management services.
If you would like to discuss how these questions fit into your retirement plan, we invite you to schedule a conversation.
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By Paul Levin, CFP®, ChFC®, RICP®*, TPCP®
Managing Principal, Retirement Refined
*RICP® conferred by The American College.
Securities and advisory services offered through LPL Financial, Member FINRA/SIPC and a Registered Investment Advisor.
Investing involves risk, including loss of principal. This guide provides general education, not individualized investment or tax advice. Its illustration is hypothetical and does not represent any investment, index, client account or Retirement Refined performance.
Sources verified October 1, 2026. Revisit the assumptions, income needs and applicable account rules as your circumstances change.
