Sequence of return risk is a stealthy threat to retirees: even if two people earn the same average returns, the order of those returns can make one person run out of money decades earlier than the other kitces.com. In other words, withdrawing funds during early market downturns can deplete a retirement nest egg faster than if those losses occurred later, even if long-term averages are identical kitces.com. For example, two retirees – Alan and Charlie – each start with $1 million, plan to withdraw $50,000 a year (inflation-adjusted), and both earn an average 6% return. Because Alan suffers three consecutive –15% years at the very start of retirement, his portfolio plunges to about $482,000 and he exhausts his savings by year 15. Charlie, by contrast, experiences identical losses only after year 10, so he still has roughly $247,000 left at year 15 marketsentiment.comarketsentiment.co. This dramatic difference is shown below: even though they had the same overall returns, Alan (red line) went to zero in 15 years, while Charlie (green line) still had a solid balance. This illustrates that when returns occur can be as important as how much they are marketsentiment.co marketsentiment.co.
Figure: Sequence of Return Risk – Alan (red) hits large losses early and depletes his $1M portfolio in 15 years, whereas Charlie (green) with the same overall returns endures losses later and still has money left marketsentiment.co marketsentiment.co. (Data from Market Sentiment, Apr 2025.)
Retirees face this risk especially during bear markets at the start of retirement. In fact, historical data confirm that retiring in a bad market can severely limit sustainable spending. For instance, someone retiring in 1966 (amid high inflation and flat markets) could safely withdraw only about 4% of their portfolio per year, whereas someone retiring in the booming market of 1982 could withdraw nearly 10% per year without running out of money marketsentiment.co. The chart below (50/50 stocks/bonds) shows this “maximum safe withdrawal rate” for retirees by starting year. It peaks around 1982 and dips in the late 1960s, highlighting how early-career market conditions shape retirement outcomes marketsentiment.co【13†】.
Figure: Maximum sustainable withdrawal rates over 30 years for a 50/50 portfolio by retirement year marketsentiment.co. Early retirees (e.g. 1966) saw safe rates near 4%, while those retiring in 1982 could withdraw ~10% per year. (Source: RetirementResearcher via Market Sentiment.)
What is Sequence of Return Risk?
Financial experts define sequence of return risk as the danger that the timing of investment returns can dramatically alter the longevity of a retirement portfolio kitces.com. In plain terms: if large market losses happen early in retirement, the required withdrawals will eat into principal just when the portfolio is weakest. Even if markets rebound later, it may be “too late” – the account could already be depleted. As one expert puts it, sequence risk is the risk that “even if returns average out in the long run, it doesn’t matter if ongoing withdrawals deplete the portfolio before the good returns finally show up” kitces.com.
This effect is real and quantifiable. Decades of safe-withdrawal studies (like the Trinity Study) show that retirees who started with the same nest egg but faced early losses often had a much higher failure rate than those who hit bull markets first. In extreme cases, a string of bad years at the start can turn a historically “safe” 4% withdrawal into a recipe for running out of money well before 30 years. Put simply: a bad first decade can undo decades of savings, while the same bad years occurring later might not matter if the retiree has already lived off the portfolio.
The 4% Rule and Safe Withdrawal Rates
Retirement planning often references the “4% rule,” which originated in the 1990s Trinity Study. Researchers found that a retiree who took 4% of their initial portfolio value in year one (and adjusted withdrawals for inflation thereafter) had about a 95–100% success rate of lasting 30 years retirementresearcher.com. In fact, for a 30-year horizon with a 50/50 stock/bond portfolio, the historical success rate was effectively 100% at a 4% initial withdrawal, dropping sharply at 5% and 6% retirementresearcher.com. In other words, past U.S. market history generally supported withdrawing 4% of savings in the first year as “safe.”
However, recent analysis suggests today’s safe rate may be lower. In 2024, Morningstar and other analysts updated their guidance using forward-looking return assumptions. Higher current stock valuations and lower bond yields imply lower future returns, so Morningstar now recommends about a 3.7% initial withdrawal rate for new retirees (down from 4.0% in 2023) planadviser.com. Likewise, articles in 2025 have noted that while 4% has held up historically in U.S. data, a 3.7% rule is now considered a more conservative baseline in low-return environments planadviser.combenefitspro.com.
It’s also important to remember that the U.S. market has been unusually strong over the past century. Global studies paint a tougher picture: one analysis of 38 developed countries over 130 years found that a 65-year-old couple who can tolerate only a 5% chance of “bankruptcy” should withdraw only about 2.26% per year, much less than 4% mdpi.com. In other words, relying blindly on the 4% rule ignores the possibility of prolonged poor markets or higher inflation.
In summary, safe withdrawal rates vary greatly by era and assumptions. The classic 4% rule came from U.S. data and a 95–100% historical success, but recent research and current market conditions suggest maybe closer to 3.5–3.7% for most retirees. And globally or in high-inflation scenarios, even that may be optimistic planadviser.commdpi.com.
Strategies to Mitigate Sequence Risk
While sequence risk can’t be eliminated (markets cycle unpredictably), retirees can adopt strategies to protect their portfolios:
-
Maintain a Cash Reserve (Emergency Fund): Keep 1–2 years of living expenses in cash or short-term bonds. This “buffer” lets you cover withdrawals during a market downturn without selling equities at depressed prices. In practice, if the market drops hard, you simply draw living costs from cash rather than liquidating stocks on a loss. This not only preserves your equity base for eventual recoveries, it also prevents depleting the portfolio as deeply. Studies and advisors note that having a short-term cash bucket is a powerful buffer – it lets you “navigate market downturns without eating into [your] investments” thepeakfp.com. For example, if you need $50,000 a year, having $250,000 in cash means you don’t touch the stock/bond portfolio for five years, giving markets time to recover. (This approach may slightly lower long-term growth, but it dramatically reduces the chance of ruin during a bad sequence.)
-
Bucket or Time-Horizon Strategy: Divide your retirement funds into time-based “buckets” to match withdrawal timing. A common approach is three buckets: Years 0–5 in cash/short-term bonds, Years 6–10 in intermediate bonds, and Years 11+ in stocks (for growth) thepeakfp.com. Fund the first bucket fully in liquid, low-risk assets (enough to cover 5 years of expenses), so you know your immediate needs are safe. Invest buckets two and three according to your overall allocation (e.g. stocks vs. bonds) for medium- and long-term growth. This way, you lock in the purchasing power of near-term money, while leaving longer-horizon dollars invested for upside. Financial planners emphasize that a well-funded short-term bucket can act as “an excellent buffer against sequence of returns risk” thepeakfp.com. In effect, you’re decoupling short-term spending needs from market swings: market crashes only force you to dip into conservative assets, not sell winners.
-
Flexible (Variable) Withdrawals: Instead of taking a fixed dollar amount each year, tie your withdrawals to your portfolio’s actual value. For example, you might withdraw a fixed percentage (say 4% of the current balance) rather than a fixed inflation-adjusted sum. In good years, this allows larger withdrawals (since the portfolio grew); in bad years, withdrawals shrink. This “guardrails” approach (pioneered by Jonathan Guyton and others) means if the market falls, you automatically cut spending; if it rises, you give yourself a raise benefitspro.com. Research shows that flexible, performance-based spending tends to extend the life of the portfolio and increase lifetime income. As Morningstar notes, retirees who take “less in bad market environments and more in better ones” can actually sustain higher overall withdrawals benefitspro.com. The trade-off is income volatility – some years you live leaner – but it can be the difference between lasting 30+ years or running out.
Together, these strategies make a retirement plan more durable. By keeping an emergency cash buffer, bucketizing assets, and adjusting spending to market conditions, retirees insulate themselves from worst-case sequences. The key is not to panic-sell equities when markets dip, and to honor a plan that adjusts to reality rather than forcing fixed withdrawals.
Behavioral Pitfalls for Retirees
Ironically, the real sequence risk for many retirees is psychological: they fail to spend their money. Surveys find that most retirees remain overly cautious and hoard their nest eggs. In a BlackRock study, retirees on average still held 80% of their pre-retirement savings even after two decades of retirement blackrock.com. In fact, only about one in four expected to ever spend down the principal – the majority preferred to keep assets “untouched” to feel secure blackrock.com. This means many retirees sacrifice lifestyle and postpone travel or big purchases, despite having ample resources.
In other words, the fear of running out often causes retirees to under-spend. Too many play it so safe that they never really enjoy the money they saved. Of course, prudence is wise, but living on $20k/year when you have $1M isn’t prudent – it’s unnecessary sacrifice. The goal of saving is to fund a comfortable retirement, not to hoard money indefinitely. As one advisor quipped, “don’t live like you’re broke when you’re actually rich.”
Conclusion
Sequence of return risk is a hidden retirement danger: it can turn a solid nest egg into a shortfall if negative returns arrive too soon. The good news is that understanding this risk allows retirees to plan around it. Keep liquid reserves, structure your portfolio by time, and remain flexible with withdrawals. Historical research (the Trinity studies and others) show that a 4% initial withdrawal can succeed in a typical U.S. 60/40 portfolio retirementresearcher.com, but only if you adapt to market reality. Today’s low-yield environment suggests maybe starting closer to 3.5–3.7% planadviser.com and being extra cautious of poor sequence. Lastly, remember that money’s purpose is to provide a life of freedom – don’t let fear lock up your wealth. With careful planning and a bit of flexibility, you can greatly mitigate sequence risk and enjoy a secure retirement thepeakfp.com benefitspro.com.
Sources: Leading financial research and industry insights (Trinity Safe-Withdrawal studies retirementresearcher.com, updated Morningstar/Morningstar data planadviser.com, global safe-withdrawal research mdpi.com, Market Sentiment analysis marketsentiment.co marketsentiment.co, BlackRock retiree surveys blackrock.com blackrock.com, and CFP guidance on bucketing thepeakfp.com thepeakfp.com). All cited above.
