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Why the timing of market losses matters just as much as investment performance.
Imagine retiring with $1 million in investments, only to watch the stock market fall 25% during your first year of retirement.
You did everything you were supposed to do. You saved consistently, invested for the future, and built a substantial retirement portfolio. Now, after years of planning, you’re finally ready to enjoy the next chapter of your life.
But there’s one retirement risk that many people don’t fully understand until it’s too late.
It’s called sequence-of-returns risk, and it can have a significant impact on how long your retirement savings last.
Here’s what makes this risk particularly concerning: Two retirees can start with the same amount of money, earn the same average investment returns, and still end up with dramatically different financial outcomes.
The difference? When those investment returns occur.
During your working years, market downturns can actually create opportunities. If you’re regularly contributing to a 401(k) or IRA, falling markets may allow you to purchase investments at lower prices.
Retirement changes that equation.
Instead of adding money to your investment accounts, you’re likely beginning to withdraw it to cover everyday living expenses.
Mortgage payments, groceries, travel, healthcare, property taxes, and other expenses don’t necessarily stop when the market declines.
This creates a potentially dangerous situation.
When you’re withdrawing money from a declining portfolio, you may be forced to sell investments at depressed prices, leaving fewer assets available to participate in a future market recovery.
That’s sequence-of-returns risk.
And while it can affect your finances at any point during retirement, the early years are particularly important because losses during this period can have a lasting impact on your portfolio.
Consider two hypothetical retirees.
Both retire at age 65 with $1 million invested. Both withdraw $40,000 annually, with withdrawals made at the beginning of each year.
Over their first five years, both experience exactly the same annual investment returns:
The only difference is the order in which those returns occur.
Retiree A experiences the worst returns first.
Their portfolio declines significantly during the first two years, precisely when they’re beginning to depend on their investments for income.
Retiree B experiences the strongest returns first.
Their portfolio has an opportunity to grow before the market downturn arrives.
Even though both retirees experience the same returns over five years, their ending portfolio balances look very different.
| Retirement Scenario | Portfolio After Five Years |
|---|---|
| Retiree A: Negative returns first | Approximately $692,000 |
| Retiree B: Positive returns first | Approximately $770,000 |
| Difference | Approximately $78,000 |
Illustrative calculations assume a $1 million starting portfolio, $40,000 withdrawals at the beginning of each year, annual returns of -20%, -10%, +5%, +10%, and +20% for Retiree A, and the reverse order for Retiree B. Figures are rounded and exclude taxes, fees, and inflation. This is a hypothetical illustration, not a forecast or guarantee.
That’s approximately $78,000 in additional retirement assets for Retiree B, despite experiencing the same five annual investment returns.
And the longer retirement continues, the more meaningful that initial difference could become.
The lesson? It’s not always about how much your investments earn. It’s also about when they earn it and how much you’re withdrawing along the way.
Many pre-retirees focus on reaching a specific savings milestone.
Perhaps your goal is $500,000, $750,000, or $1 million.
Reaching that number is certainly an accomplishment. But your account balance alone doesn’t tell you whether your retirement strategy is prepared for changing market conditions.
Consider these important questions:
These are the types of questions that help determine whether your retirement savings are positioned to support your lifestyle over time.
Because having enough money to retire and having a strategy to stay retired are two very different things.
The good news is that while no one can predict or eliminate market downturns, there are strategies that may help reduce the impact of poor investment returns early in retirement.
Your retirement portfolio shouldn’t simply be a collection of investments.
It should support a clearly defined income plan.
That means understanding how much money you’ll need, where that income will come from, and how withdrawals may change as market conditions evolve.
A coordinated retirement income strategy may incorporate Social Security, pensions, investment withdrawals, and other available income sources.
Having money available outside volatile investments may help reduce the need to sell stocks during unfavorable market conditions.
For example, some retirees maintain a portion of their near-term spending needs in cash or high-quality short-term investments.
The appropriate amount depends on your expenses, other income sources, liquidity needs, and overall financial situation.
Keep in mind that holding too much cash also presents risks, including reduced growth potential and inflation-related loss of purchasing power.
An investment strategy that made sense at age 45 may not be appropriate at age 65.
As retirement approaches, your financial priorities may shift from maximizing long-term growth toward balancing growth, income, and capital preservation.
This doesn’t necessarily mean abandoning stocks.
It means determining an appropriate balance between growth-oriented investments and assets designed to provide stability.
Retirement spending doesn’t always have to follow a rigid schedule.
A flexible withdrawal strategy may allow you to adjust discretionary spending during difficult market periods while maintaining sufficient income for essential expenses.
For example, postponing a major purchase or reducing optional withdrawals during a market decline may help preserve invested assets.
Even relatively modest adjustments can make a difference over a long retirement.
For some retirees, dependable income from Social Security, pensions, or appropriately selected insurance-based income solutions may help cover essential living expenses.
This can reduce reliance on selling investments to pay monthly bills.
However, guaranteed-income products have important trade-offs, including costs, liquidity limitations, contractual conditions, and insurer financial strength considerations. They aren’t appropriate for everyone.
The objective is to evaluate how different income sources can work together within a comprehensive retirement plan.
One of the most difficult times to make major financial decisions is when markets are declining and emotions are running high.
Unfortunately, that’s when some retirees discover that their investment strategy and retirement income needs aren’t properly aligned.
They may find themselves asking:
Should I stop taking withdrawals?
Should I sell investments before things get worse?
Do I need to delay retirement or return to work?
Will my savings still last another 25 years?
These are important questions, but ideally, they should be addressed before a market downturn occurs.
A well-designed retirement strategy should account for difficult market conditions, not depend on favorable markets every year.
At Patria Wealth Group, we believe successful retirement planning goes beyond selecting investments and watching account balances.
It’s about developing a comprehensive strategy that considers your retirement income, investment risk, taxes, Social Security, healthcare expenses, and long-term financial goals.
Whether you’re approaching retirement with $500,000, $750,000, $1 million, or more in investable assets, understanding how your portfolio may respond to different market conditions is an important part of the planning process.
Because retirement isn’t just about growing your wealth.
It’s about helping your wealth support the life you’ve worked so hard to build.
A market downturn shouldn’t be the first time you discover whether your retirement income strategy is prepared for the unexpected.
If you’re within five years of retirement or have recently retired, now may be an ideal time to evaluate how your savings, investments, and income sources work together.
At Patria Wealth Group, we help individuals and families take a comprehensive approach to retirement planning, including evaluating investment risk, income needs, and strategies designed to address market uncertainty.
Take the first step toward understanding your retirement income picture.
Visit our Retirement Income Foundation to explore your retirement income planning needs and start a conversation with our team.
Patria Wealth Group | Your Family. Your Future. Our Priority.
Important Disclosure: This article is intended for educational and informational purposes only and should not be considered individualized investment, tax, or legal advice. Investing involves risk, including possible loss of principal. Diversification and asset allocation do not guarantee a profit or protect against losses. Hypothetical examples are for illustration only and do not represent actual investment results. Consult qualified financial, tax, and legal professionals regarding your individual circumstances.
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