The Forgotten Risk That Could Derail Your Retirement: Sequence of Returns
- The Real Money Pros
- Jun 4
- 4 min read
If you’re preparing for retirement—or recently made the leap—there’s one sneaky risk that could quietly unravel even the most carefully planned retirement portfolio.
It’s not taxes. It’s not inflation. It’s not even market volatility alone!
It’s something called Sequence of Return Risk—and understanding it could be the key to protecting your financial future.
What is Sequence of Return Risk?
Most retirement calculators and planning tools focus on one number: your average rate of return.
For example, they might assume you’ll earn 7% annually and calculate your income and longevity from there.
But here’s the problem: you don’t actually earn the average return every year. Markets go up and down. One year might bring a 20% gain, the next a 15% loss. And when those good or bad years happen—especially early in retirement—can have a massive impact on your outcome.
That’s sequence of return risk. It’s the order of your investment returns—not just the average—that matters most once you start withdrawing from your accounts.
Why This Matters
Imagine two retirees—Retiree A and Retiree B. They both:
Retire with $1 million
Plan to withdraw $50,000 a year
Expect to earn a long-term average of 7% annually
But the market doesn't cooperate in the same way for both of them.
Retiree A:
Starts retirement in a strong bull market:
Year 1: +20% → $1,140,000
Year 2: +12% → $1,213,600
Year 3: +8% → $1,262,688
Year 4: –10% → $1,086,419
Year 5: –15% → $857,456
After five years of withdrawals and market fluctuations, they still have $857,456 in their portfolio.
Retiree B:
Starts retirement in a downturn:
Year 1: –20% → $760,000
Year 2: –12% → $668,800
Year 3: –8% → $562,896
Year 4: +10% → $563,186
Year 5: +15% → $597,664
After five years? Their portfolio is down to just $597,664—even though the average return is the same.
That’s over a quarter-million-dollar difference in just five years. And it all came down to when the returns happened—not how big they were on average.
It’s Psychological
Let’s be real—retirement is emotional. After decades of saving and working hard, watching your nest egg plunge right after you stop earning a paycheck is terrifying. And it can cause retirees to make panic-driven decisions—selling low, locking in losses, or abandoning long-term plans.
Sequence of return risk is not just a math problem.It’s a mindset challenge.
The early years of retirement are fragile. What happens in that first 5–10 years can set the tone for your entire retirement journey.
How Do You Protect Yourself?
Here’s the good news: you can manage sequence of return risk—with the right strategy. At our firm, we use a time-tested approach called the Bucket Strategy.
The Bucket Strategy segments your retirement savings into three distinct “buckets” based on time horizon and purpose.
Bucket 1: Cash and Short-Term Needs
Covers 1 to 3 years of living expenses
Held in cash or very liquid, low-risk accounts
Purpose: Provide a cushion and income when markets drop
This bucket allows you to avoid selling stocks during downturns. It acts as your personal buffer.
Bucket 2: Income and Stability
Includes bonds, rentals, and dividend-paying investments
Generates more reliable income with lower volatility
Purpose: Replenish Bucket 1 as needed without excessive risk
This is your middle ground—less growth, more stability.
Bucket 3: Growth and Long-Term Goals
Stocks, ETFs, real estate, or other growth assets
Designed to outpace inflation and fund later retirement years
Purpose: Keep your plan sustainable over 20–30+ years
Yes, this bucket is volatile—but you don’t need it today. And because you’re not forced to sell in a downturn, you give these investments time to recover and grow.
Real-World Proof: The 2008 Crisis
Let’s go back to 2008. The S&P 500 lost nearly 40% in one year.
If you had just retired that year and didn’t have a cash reserve? You’d have been forced to sell your investments at massive losses just to pay the bills.
But if you had used the bucket strategy? You could’ve lived off Bucket 1 (cash) while letting your growth investments recover. By 2011, the market had rebounded significantly. At that point, you could sell at gains instead of losses—and keep your retirement intact.
That’s the power of proactive planning!
Final Thoughts: Planning > Predicting
You can't predict the market. You can plan for it. Sequence of return risk won’t make headlines on the news, but for retirees, it’s a very real threat—and one of the most overlooked.
Thankfully, it’s also very manageable—when you use strategies like:
Diversified buckets
Conservative withdrawal rates
Rebalancing with intention
Working with a trusted advisor
Conclusion
We can help! Here, we don’t just manage money—we help protect futures.
Visit therealmoneypros.com, click “Ask the Experts,” and let’s start building a plan that keeps your retirement secure—no matter what the market throws your way.
Disclosure
Apollon Wealth Management, LLC dba Tree City of Apollon (Apollon) is an investment advisor registered with the SEC. This document is intended for the exclusive use of clients or prospective clients of Apollon. Any dissemination or distribution is strictly prohibited. Information provided in this document is for informational and/or educational purposes only and is not, in any way, to be considered investment advice nor a recommendation of any investment product or service and is in no way tax advice. While every effort has been made to ensure accuracy, only the IRS tax code itself should be considered official. Apollon does not file taxes for any clients. Advice may only be provided after entering into an engagement agreement and providing Apollon with all requested background and account information. Please visit our website http://apollonwealthmanagement.com for other important disclosures.
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