Sequence-of-Returns Risk: Why When You Retire Matters as Much as How Much You Saved

The danger

If markets drop 30% in the year you retire and you withdraw 4%, you're selling shares cheap to pay bills. Even if markets recover, the depleted balance compounds against you for the rest of your life.

How to protect against it

• Hold 2–3 years of expenses in cash at retirement.
• Have 5–7 years of expenses in bonds.
• Delay Social Security to reduce required withdrawals.
• Reduce spending temporarily in bad early years (the guardrails approach).
• Have a part-time income available for the first 5 years.

The 'retirement red zone'

The 5 years before and after retirement are when sequence risk is highest. Once you've made it 7–10 years into retirement without a major drawdown, the danger eases substantially.

Bottom line

Sequence risk is real but manageable. The simplest defense: don't be fully invested in stocks at retirement, and have at least 2 years of expenses outside the market so you never have to sell low.