Most people spend three or four decades building wealth. They save consistently, invest wisely, and watch their portfolio grow — and by the time retirement arrives, they have a number that feels like security.
What very few people ask — and what most advisors don't volunteer — is this: What happens to my income if the market drops 30% in the first year I retire?
That question is the heart of something called sequence-of-returns risk. It's one of the most consequential threats to a retirement plan that looks perfectly fine on paper — and it's especially relevant for St. Louis families approaching retirement with meaningful assets.
What is sequence-of-returns risk?
Sequence-of-returns risk is the danger that the timing of investment losses — not just the losses themselves — can permanently damage your retirement income.
Here's why it matters: during your working years, a market drop is actually an opportunity. You're buying more shares at lower prices, and when the market recovers, your portfolio bounces back. The order of returns doesn't affect you much because you're not selling anything.
Retirement changes everything. The moment you start drawing income from your portfolio, you're selling shares — regardless of whether the market is up or down. And when the market is down, you're selling more shares than you would otherwise need to generate the same dollar amount. Those shares are gone permanently. They won't be there to recover with the market.
The math never fully catches up.
A tale of two retirements
Consider two retirees — both with $2 million, both withdrawing $80,000 per year to live on, both experiencing the exact same average annual return over 20 years. The only difference is the order in which those returns arrive.
Retiree A retires into a 30% market decline in year one. Their $2M portfolio drops to $1.4M before they've made a single withdrawal. They pull $80,000 for living expenses. Now they have $1.32M — and they're already behind, selling shares at the worst possible time to fund the gap.
Retiree B experiences that same 30% decline — but in year 10, after a decade of growth. By then, the portfolio has already compounded. There's more cushion. The same bad year is absorbed far more easily.
Same average returns. Same withdrawal amount. Dramatically different outcomes. In many modeled scenarios, Retiree A runs out of money years before Retiree B — not because of anything they did wrong, but purely because of timing.
Why this risk is easy to miss
Most retirement projections use average annual returns. Run a Monte Carlo simulation or a simple spreadsheet, and you'll often see something like: "assuming 6% average annual growth, your money lasts 30 years."
What those projections often don't show you is what happens when those returns come in the wrong order. A single bad sequence in the first five years of retirement can undermine a plan that looked bulletproof on paper.
It's also worth noting that sequence-of-returns risk is largely invisible during accumulation — which is why so many pre-retirees are surprised to learn about it. The financial habits and portfolio structure that served you well for 30 years may not be the right structure for the next 30.
A plan built for accumulation looks very different from a plan built for distribution.
How to protect against it
The good news: sequence-of-returns risk is manageable when you plan for it deliberately. There's no single magic solution, but a well-structured distribution strategy typically involves several layers working together.
A cash reserve. Holding 12–24 months of living expenses in cash or a stable, liquid account means you don't have to sell equities during a downturn. You draw from the reserve while markets recover, preserving shares that would otherwise be sold at a loss.
A bond or fixed-income ladder. Structuring a portion of your portfolio in short-to-medium-term bonds or fixed-income instruments creates a reliable income source for years 2 through 5 or 6. This extends your buffer well beyond the cash reserve and reduces the window during which you're vulnerable to selling equities at a loss.
A flexible spending framework. Having a pre-agreed plan for how to adjust withdrawals when markets decline — even modestly, such as reducing discretionary spending by 10–15% in a down year — can meaningfully extend a portfolio's longevity without dramatically changing your lifestyle.
None of this is complicated. But it requires intentional planning — ideally before you retire, while you still have time to structure things properly.
The question worth asking now
If you're within 5–10 years of retirement or less — or already retired — the most valuable question you can ask isn't "what's my rate of return?" It's: "Can my income plan survive a bad first few years?"
Not because a crash is inevitable. But because a retirement plan that can't survive a bad year isn't really a plan — it's a hope.
At One Bridge Wealth Management, we work with high-net-worth families in the St. Louis area who've spent decades building meaningful wealth and want to make sure their income plan is built for what's ahead — not just what's already happened. If you'd like to stress-test your retirement income plan, we're happy to take a look.
See how we work with high-net-worth families
Frequently asked questions
What is sequence-of-returns risk?
Sequence-of-returns risk is the danger that poor investment returns early in retirement — before or just after you start withdrawing income — can permanently reduce your portfolio's longevity, even if long-term average returns are identical to a better scenario. The order in which returns occur matters as much as the returns themselves.
Why does it matter more in retirement than during accumulation?
During accumulation, a market drop means you're buying shares at lower prices — which is an advantage. In retirement, a market drop forces you to sell shares at depressed prices to fund living expenses, locking in losses before the market recovers. This permanently reduces the number of shares left to benefit from any recovery.
How can I protect my retirement income from sequence-of-returns risk?
The most effective strategies include maintaining a cash reserve of 1–2 years of living expenses, building a bond or fixed-income ladder for near-term income needs, and establishing a flexible spending framework that adjusts withdrawals during down markets. A financial advisor who also acts as a fiduciary while managing assets can help you structure a distribution plan specific to your situation.
Does sequence-of-returns risk affect everyone in retirement?
It primarily affects retirees who depend on their portfolio for income. If your income needs are fully covered by Social Security, a pension, or other guaranteed sources, your exposure is limited. For most families with $2M–$10M in investable assets, however, portfolio withdrawals play a significant role — making sequence risk an important planning consideration.
Is sequence-of-returns risk the same as market risk?
No. Market risk refers to the possibility of losses due to market movements. Sequence-of-returns risk is specifically about the timing of those movements relative to when you begin drawing income. You can have identical average annual returns over a 20-year retirement and end up with dramatically different outcomes depending on when the bad years occur.
This content is provided for educational purposes only and does not constitute investment, tax, or legal advice. Past performance is not indicative of future results. Please consult a qualified financial professional before making any investment decisions.