The Hidden Retirement Risk Most People Have Never Heard Of

Two people retire with the same $1 million. They invest in the same portfolio, withdraw the same $40,000 a year, and over time the market delivers them the same average returns. Fifteen years later, one of them has nearly double the money of the other.

Nothing about their skill, discipline, or luck in picking investments was different. The only difference was timing — and it points to one of the biggest threats to retirement security that most people have never heard of: sequence of returns risk.

What sequence of returns risk actually is

During your working years, the order of market returns barely matters. A bad year early or a bad year late — it averages out, because you're adding money the whole time. A downturn even works in your favor: your monthly contributions buy shares at a discount.

Retirement flips that logic on its head. Once you start withdrawing, every withdrawal you take while prices are down means selling more shares to raise the same cash — and those shares are gone. When the market recovers, it recovers without them.

A tale of two retirees

Consider two neighbors. The first retired in 2007, directly into the teeth of the 2008 financial crisis. The second retired in 2010, just as markets began to recover. Both started with $1 million in identical portfolios, and both withdrew $40,000 a year.

The first retiree's portfolio was hit twice at once — falling prices and ongoing withdrawals — and it never fully caught up. By 2022, the second retiree's portfolio was worth nearly twice as much, despite living through the very same markets. Same savings, same discipline, same investments. Different starting year.

You can't control when you retire relative to the next downturn. But you can control how exposed you are when it comes.

What you can do about it

The retirees who weather an early downturn are the ones who never have to sell investments at the bottom. Three practical defenses:

1. Keep a cash cushion. Holding roughly two to three years of planned expenses in cash or short-term reserves means a bear market doesn't force you to sell shares at depressed prices. You spend from the cushion and let the portfolio recover.

2. Cover your essentials with income you can count on. When your baseline expenses are met by Social Security, a pension, or guaranteed income from an annuity, market swings stop threatening your grocery bill. The rest of your portfolio gets the time it needs to breathe.

3. Plan your withdrawals — don't improvise them. Which account you draw from, in what order, matters for both taxes and market exposure. A written withdrawal strategy beats deciding under pressure in a down market.

The window that matters most

The five years before and after your retirement date are the most consequential of your entire financial life. Decisions made in that window — how much cash to hold, how to structure income, when to start withdrawals — echo through the next thirty years.

If you are within ten years of retiring and do not know how exposed you are to an early downturn, I am happy to look at it with you.