Sequence Risk: Why the First Five Years of Retirement Decide Everything

Two retirees can earn the same average return over thirty years and meet opposite fates: the one who hit a bear market in years one and two, while withdrawing, may run out of money, while the one whose crash came in year twenty barely notices. That is sequence-of-returns risk: once you are selling shares to eat, the order of returns matters as much as their average.

It is the defining financial risk of the five years on either side of retirement day, and it is manageable with structure rather than prediction.

Why Withdrawals Change the Math

An accumulator buying through a crash purchases shares on sale; a withdrawer selling through one locks losses in permanently, leaving fewer shares to recover. A portfolio down 30% in year one, under a fixed inflation-adjusted withdrawal, must earn far more than it lost just to return to plan, because withdrawals kept draining it at the bottom. The historical failure cases behind the 4% rule are almost all early-crash sequences, which is why the rule is as conservative as it is.

Defense One: the Spending Buffer

Hold two to four years of planned portfolio withdrawals in cash and short high-quality bonds, and spend from that bucket whenever stocks are meaningfully down, refilling it in recovery years. The buffer's purpose is not return, it is never being forced to sell equities at the bottom. Pair it with a sensible overall allocation; many planners glide toward more bonds approaching retirement day, then let equities drift back up as the danger window passes, the so-called bond tent.

Defense Two: Flexible Spending

Willingness to cut discretionary spending 10% to 15% in bad markets is the single most powerful sustainability lever in the research: small, temporary cuts in down years extend portfolio life dramatically versus rigid inflation-adjusted withdrawals. Build the flexibility in advance: know which lines, travel, gifts, projects, would pause, so a bear market triggers a plan instead of a panic. Guardrail systems formalize this, raising spending after strong runs and trimming after weak ones.

Defense Three: Guaranteed Income Floors

Every dollar of guaranteed inflation-adjusted income, delayed Social Security above all, shrinks the withdrawals exposed to sequence risk. Some households add a pension-like floor with an income annuity covering essentials, so market swings threaten comforts, not groceries. With a floor, buffer, and flexibility in place, the equity portfolio can be left alone to do its long-run work.

Stress-testing a plan against ugly sequences, not just average returns, is standard practice in our retirement planning.

Tony Colunga · Founder, Attend Wealth

Tony leads Attend Wealth, a fee-based wealth management firm in Atlanta serving professionals, families, and business owners. Advisory services are held to a fiduciary standard. More about Attend