Sequence of Returns Risk: Why the Years Around Retirement Matter Most

You spent thirty years growing your portfolio. Whether it lasts another thirty may come down to the five years before and 5 years after the day you stop working.

That is sequence of returns risk, and you can prepare for it before it arrives.

The Short Answer

Sequence of returns risk is the danger that a market downturn early in retirement, while you are withdrawing money, causes lasting damage that the same downturn later would not. The risk is concentrated in the “retirement risk zone,” roughly the five years before and after retirement, when your portfolio is near its largest and has less time to recover. Cash reserves, spending flexibility and coordinated income can help reduce the exposure. The earlier you plan, the more options you have.

Why the Order Matters

While you are saving, a bad sequence is usually easier to absorb. You are still contributing and are not yet relying on the portfolio for income.

Retirement changes that. Once you begin living off the portfolio, an early decline may force you to sell shares to cover spending. Those shares cannot participate in the eventual recovery, turning part of a temporary market decline into a permanent portfolio loss.

Two retirees can earn the same average return and still end up in very different places. Consider a hypothetical example for illustration only, not a projection of any actual account. Both retirees start with $1 million, withdraw $50,000 a year adjusted for inflation and earn the same average return over 25 years. The only difference is timing.

One encounters a steep loss in year one and must sell into the decline. The other encounters the same loss in year twenty-four, after decades of growth. With a sufficiently bad early sequence, the first retiree can run out of money years before the second, who may still have a substantial balance. The order of the returns created the difference.

The Retirement Risk Zone

Researchers call the period roughly five years before and five years after retirement the retirement risk zone.² Three pressures overlap during this window.

Your portfolio is near its peak, so a given percentage decline can produce one of the largest dollar losses you have experienced. Withdrawals are about to begin or have already started. And without a paycheck replenishing the account, the portfolio has less time and less outside support to recover.

Retirement researcher Wade Pfau found that returns during roughly the first ten years can explain about 77% of how a retirement turns out.³ That finding does not predict the result of any individual plan, but it shows how heavily early returns can weigh on a 30-year retirement.

Because the zone opens before the final paycheck clears, sequence risk is a pre-retirement planning issue as much as a retirement issue.

The Portfolio That Got You Here Wasn’t Built for This

During your working years, your portfolio was built mainly for growth. In retirement, it must also fund spending, and those goals can conflict.

Morningstar’s 2026 research puts the “safe” starting withdrawal rate at 3.9%, up from 3.7% the year before.⁴ The term comes from retirement research and does not promise safety. It refers to the amount a retiree could withdraw in the first year, increase with inflation and have a high probability of sustaining for 30 years.

Adding more stocks does not necessarily raise that rate. Beyond a certain point, the additional volatility increases sequence risk and can lower the sustainable withdrawal rate. The same research found that a retiree willing to adjust spending by taking less in weak years could support a starting rate closer to 5.7%.⁴

That range, from 3.9% to 5.7% within one study, is driven largely by how withdrawals are managed. What an individual plan can support also depends on spending flexibility, other income, time horizon and taxes. A general formula cannot account for all of those factors.

What You Can Do About It

The following approaches can make a retirement plan more resilient, although none guarantees a particular outcome:

• Hold a cash and short-term reserve. Keeping one to three years of spending in cash and high-quality short-term bonds gives you another source to draw from during a downturn, reducing the need to sell stocks at depressed prices.¹
• Segment your money by when you expect to spend it. A “bucket” approach might keep next year’s spending out of the stock market, mid-term money in a balanced mix and long-term money invested for growth.⁵
• Allow some spending flexibility. Trimming withdrawals after weak years and allowing increases after strong ones is among the most effective ways, according to the research, to improve how long a portfolio lasts.⁴
• Coordinate your income. Social Security timing, pension income and the order in which you draw from different accounts all affect how hard the portfolio must work during a bad year. Other income may help cover spending while markets recover.⁶

Consider two people entering the risk zone. This example is hypothetical and for illustration only. One has a pension covering her fixed costs and two years of spending in cash. A rough market year is an inconvenience. The other depends entirely on his portfolio, with next year’s travel and tax expenses invested in stocks. The same downturn forces him to sell at depressed prices.

How We Build Around It: Cambridge’s A.I.M. System

Cambridge Advisors is a fee-only, fiduciary investment adviser in Omaha, Nebraska, registered with the SEC. We build each client’s income strategy through our A.I.M. System: Assess, Implement and Monitor.

Assess begins with the questions that shape the plan: your spending needs, other income, time horizon, health, tax picture and the amount of spending flexibility you could tolerate during a difficult market.

Implement turns those answers into decisions about the size of your cash reserve, which accounts to draw from first and how the portfolio should change as your paycheck stops. Your income needs help determine the allocation.

Monitor keeps the plan current as markets and circumstances change. We may refill reserves during strong markets and revisit spending during weak ones. Financial planning is included in our investment management fee, so those reviews are part of the relationship rather than a separate charge.

The best time to make these decisions is before the paycheck stops, while cash reserves, portfolio allocation, spending and income timing can still be coordinated.

Key Takeaways

The order of your returns can matter as much as the average. An early downturn, while you are withdrawing, does damage a later one wouldn't.

The risk concentrates in the “retirement risk zone” — roughly five years before and after retirement — when the balance is largest and recovery time is shortest.

More stocks is not the same as more safety: past a point, added volatility raises sequence risk and lowers the sustainable withdrawal rate.

You can't eliminate sequence risk, but cash reserves, spending flexibility, and coordinated income can reduce your exposure — and they work best when they are in place before the zone.

Frequently Asked Questions

What is the retirement risk zone?

It is roughly the five years before and five years after you retire, when your portfolio is largest, withdrawals are starting, and there is the least time to recover from a loss. Sequence of returns risk is at its highest here.²

At what age does sequence of returns risk matter most?

It is tied to your retirement date, not a specific age. The risk peaks in the years immediately surrounding when you stop working and begin drawing income.

How is sequence risk different from ordinary market risk?

Market risk is that prices rise and fall. Sequence risk is about the order of those moves combined with your withdrawals: the same average return can produce very different outcomes depending on when the bad years arrive.

Can you eliminate sequence of returns risk?

No. You can reduce your exposure and prepare for it — with cash reserves, spending flexibility, and income coordination — but no strategy removes it entirely.

Talk It Through

If you are within a few years of retirement and want to see how sequence risk lands on your own plan, we are glad to talk it through. Discovery meetings at Cambridge Advisors are complimentary, with no obligation.

Disclosures 

This article is for educational purposes only and is not investment, tax, or legal advice. It does not consider your individual circumstances. Consult a qualified professional before acting on any information here. Cambridge Advisors Inc. is a fee-only registered investment adviser. Registration does not imply a certain level of skill or training. Advisory services are offered only under a written agreement. Past performance does not guarantee future results. All investing involves risk, including possible loss of principal. Examples are hypothetical and for illustration only. Data cited from third-party sources is believed reliable but is not guaranteed. Figures are estimates as of the access date shown and may change.

Endnotes

1. Charles Schwab, “Timing Matters: Understanding Sequence-of-Returns Risk.” schwab.com/learn/story/timing-matters-understanding-sequence-returns-risk. Accessed 08/14/26.

2. Morningstar, “What Is the Retirement Risk Zone?” morningstar.com/retirement/what-is-retirement-risk-zone. Accessed 08/14/26.

3. Wade D. Pfau, “The Lifetime Sequence of Returns: A Retirement Planning White Paper” (The American College of Financial Services). Accessed 08/14/26.

4. Morningstar, “What's a Safe Retirement Withdrawal Rate for 2026?” and The State of Retirement Income (2026 rate; report released Dec. 3, 2025). morningstar.com/retirement/whats-safe-retirement-withdrawal-rate-2026. Accessed 08/14/26.

5. Michael Kitces, “Managing Sequence Risk: Bucket Strategies vs. a Total Return Rebalancing Approach.” kitces.com. Accessed 08/14/26.

6. U.S. Bank, “Sequence of Returns Risk and Impact on When to Retire.” usbank.com. Accessed 08/14/26.