When people think about investing for retirement, they often focus on the returns the assets in their account will produce. For example, if a portfolio averages 6% or 7% per year over a long period, that may sound reassuring on paper. But once you retire and start withdrawing money to support your lifestyle, something else becomes important: when those gains and losses happen.  
A helpful way to think about this is to imagine your retirement savings like a reservoir that supplies water to a town. If the reservoir stays full while water is being used, the town is fine. But if a drought occurs just as the town starts drawing heavily from the reservoir, the water level can drop quickly, even if rainfall improves later.  
Investing can work in a similar way during retirement. If markets experience losses early in your retirement, as withdrawals begin, the portfolio may decline faster than expected. Even if markets recover later, there may be fewer assets left invested to benefit from that recovery. This idea is called sequence-of-returns risk. It refers to how the timing of market returns, especially early in retirement, can influence how long a portfolio lasts when income is being withdrawn. 
One of the frequent questions I receive from people approaching retirement is:  Why can market losses early in retirement have a bigger impact on my portfolio?
At Fisher Financial Group, LLC, our discussions about retirement planning in Northbrook often include conversations about sequence-of-returns risk and how it may influence retirement income strategies.
What Is Sequence-of-Returns Risk?
In simple terms, sequence-of-returns risk focuses on the order of market returns rather than the average return alone. For example, imagine two retirees who earn the same average return over a 20-year retirement. On paper, their results may look identical. But the timing of those returns can lead to very different outcomes.
If one retiree experiences market losses during the first few years of retirement, when they have already started withdrawing money, their portfolio may shrink faster. That’s because they are taking withdrawals while the value of their investments is temporarily lower.
Another retiree who experiences those same market losses later in retirement may not feel the same impact, because their portfolio had more time to grow before the downturn occurred.
You can think of it like taking money out of a savings bucket while the water level is dropping. When the level is already low, each withdrawal takes a bigger share of what remains. This situation is sometimes referred to as “dollar-cost ravaging.” It’s essentially the opposite of dollar-cost averaging. Instead of buying investments at lower prices over time, retirees may have to sell investments during market declines to generate the income they need.
This dynamic is why sequence-of-returns risk is often discussed in the context of retirement income planning.
How Does Sequence-of-Returns Risk Impact Retirement? 
Sequence-of-returns risk becomes more relevant once you transition from saving for retirement to withdrawing income from investments. During the accumulation phase of life, market downturns can be concerning but also offer opportunities to invest at lower prices. Over time, continued contributions and market recoveries may offset those declines. 
Retirement introduces a different dynamic. Instead of contributing new money to investment accounts, you may be withdrawing funds to support living expenses. When withdrawals occur during a market decline, a larger percentage of the portfolio may be sold at lower prices.
This can create a compounding effect.
If markets recover later, the portfolio may have fewer invested assets remaining to benefit from that recovery.
Why Does the Timing of Returns Matter More in Retirement Than Average Returns? 
Average returns can sometimes mask what actually happens within a portfolio over time. For instance, a portfolio that averages 6% per year might include years with double-digit gains and years with significant losses. When a retiree is drawing income from that portfolio, the sequence of those gains and losses becomes an important variable. 
Early retirement years are often the most sensitive period because withdrawals are beginning while the portfolio must still support a potentially long retirement horizon.
If market volatility occurs during these early years, withdrawals may amplify those losses. Over time, that can affect how much capital remains invested and how long the portfolio continues to generate income. 
This is why retirement planning often focuses not only on expected returns but also on how portfolios may behave during different market environments. Working with a retirement planner in Northbrook often involves reviewing how market fluctuations could interact with withdrawal strategies over time.
How Can You Mitigate or Reduce Sequence-of-Returns Risk? 
While market performance can’t be predicted, several financial planning strategies are sometimes considered when discussing sequence-of-returns risk. Each approach involves evaluating how investment structure, withdrawal timing, and income sources may interact over time.
Diversification Across Asset Classes
Diversification is a foundational concept in portfolio construction. Holding a mix of investments, such as equities, bonds, and other asset classes, may help reduce reliance on a single asset class. Different investments may respond differently to economic conditions. This diversification can potentially reduce the magnitude of portfolio fluctuations during certain market environments.  
In the context of retirement planning in Northbrook, diversification often becomes part of broader discussions about risk tolerance and long-term investment goals.
The Bucket Strategy for Retirement Income
Another approach frequently discussed in retirement income planning is the bucket strategy. This method organizes retirement assets into different categories based on time horizon and spending needs. For example: 


Short-term bucket: assets designed to cover near-term spending needs


Intermediate bucket: assets positioned for moderate growth and income


Long-term bucket: assets intended for long-term growth potential


The idea behind this approach is to help retirees avoid selling long-term growth assets during short-term market declines when possible. While the structure varies from household to household, the concept aims to align investments with different spending timelines.
How Can Flexible Withdrawal Strategies Help Protect Retirement Income?
Many retirement income plans begin with a withdrawal guideline, often a percentage of the portfolio that can be withdrawn each year to support living expenses. While this can provide a helpful starting point, some retirees find that maintaining the exact same withdrawal amount every year may not always align with changing market conditions. This is where flexible withdrawal strategies come into the conversation. 
Instead of withdrawing the same amount each year regardless of market conditions, a flexible approach lets you adjust your withdrawals when necessary.  
For example, during years when markets perform well, withdrawals may remain steady or increase slightly to support lifestyle goals. During periods of market volatility, some retirees may choose to temporarily reduce withdrawals or rely on other income sources.
You can think of this approach like adjusting spending during a household budget. When income is higher, families may feel comfortable spending a little more. When income temporarily drops, they may scale back discretionary spending until conditions improve. Flexible withdrawal strategies follow a similar principle in retirement income planning. By adjusting withdrawals during certain market environments, you may avoid selling larger portions of your portfolios during downturns. 
At Fisher Financial Group, LLC, our retirement planning process focuses on flexible withdrawal strategies alongside other factors such as investment allocation, Social Security timing, and long-term spending goals. When these elements are reviewed together, you can better understand how different withdrawal approaches may influence your retirement income over time. 
Why Is It Important to Have Multiple Sources of Retirement Income?
Another factor that can influence sequence-of-returns risk is the structure of retirement income, especially if you plan on relying on several income sources, such as:  


Social Security benefits


Pension income


Investment withdrawals


Other income sources, such as rental income or part-time work


When income is distributed across multiple sources, you may rely less heavily on withdrawing from investment portfolios during certain market periods. This diversification of income sources can play a role in retirement income planning.
How Can Delaying Retirement or Withdrawals Affect Your Retirement Income Plan?
The timing of retirement and when you begin withdrawing money from your investment accounts can influence how your retirement income plan unfolds over time. For some, delaying retirement or postponing withdrawals may provide additional time for investments to remain in the market before they are used to support living expenses.  
In retirement planning, keeping investments invested for a longer period may increase the time available for potential growth before withdrawals begin. Delaying withdrawals can also affect how different retirement income sources interact. For example, some individuals explore delaying Social Security benefits or postponing withdrawals from retirement accounts while relying on other resources in the early years of retirement. These decisions may influence how income is distributed across different stages of retirement. 
From a financial planning perspective, the goal is not necessarily to delay retirement itself, but rather to evaluate how the timing of income sources, withdrawals, and spending needs fit together over the long term.
What Strategies Can Help Address Sequence-of-Returns Risk in Early Retirement?
The early years of retirement are sometimes described as a transition period during which investment strategies shift from accumulation to distribution. Because this period can be sensitive to market fluctuations, some investors explore ways to review portfolio structure and spending patterns during these years.  
Strategies discussed during this phase may include: 


Reviewing asset allocation as retirement approaches


Maintaining a portion of assets for short-term income needs


Evaluating the timing of withdrawals from different account types


Revisiting spending assumptions periodically


These conversations are often part of ongoing retirement planning discussions with financial advisors in Northbrook. Ready to discuss your retirement planning needs? Connect with us today.
 
          

About the author

Dan Fisher is a Registered Financial Consultant (RFC) and Federal Retirement Consultant (FRC) who has spent more than three decades guiding retirees and pre-retirees through tax-smart investing and income planning. As the founder of Fisher Financial Group, he brings a practical approach to helping clients make informed choices about their retirement.