Key Takeaways

• Sequence risk occurs when market downturns and portfolio withdrawals overlap, reducing long-term retirement income.
• Market declines early in retirement are especially harmful because retirees must sell investments at low valuations.
• Shifting toward cash and short-term bonds can reduce volatility and provide liquidity during periods of market stress.
• Adjusting spending and withdrawal rates during downturns helps preserve principal and improves long-term outcomes.
• Longer retirements heighten sequence risk, making structured withdrawal planning essential for lifetime income stability.

Gerard “Gerry” Dougherty, a Boston-based financial advisor and president of Boston Independence Group, Inc., has spent over three decades helping individuals prepare for a secure retirement.

A National Social Security Advisor and author of Uncomplicated Money, Gerard Dougherty educates retirees on strategies to protect their savings and extend their income through customized financial plans. He hosts the long-running radio program Making Money Last and the podcast Retirement Is Within Reach, offering guidance on market trends, Social Security, and income management. Mr. Dougherty also contributes to Kiplinger.com, where he writes about wealth creation and financial literacy. Drawing from his expertise,

Gerard Dougherty explains the concept of sequence risk – how the timing of market fluctuations and withdrawals can affect retirement income – and outlines strategies for minimizing its impact on long-term financial security.

Retirement Planning and Sequence Risks

Retirement planning includes considering sequence risks, which reflect how withdrawals of retirement account funds and the broader market impact the overall rate of available returns. Suboptimally timing withdrawals can impact the availability of income accrued over a lifetime of investing, particularly for those nearing retirement, as they will contribute less new capital to offset losses, which often drops to zero after retirement.

Most retirement portfolios comprise a diverse range of investments, including stocks, bonds, and alternative assets such as real estate, which provide long-term income and growth opportunities.

Thus, a market decline becomes the most disruptive scenario, especially if it occurs early in retirement, when retirees begin to withdraw money from portfolio accounts to maintain their preferred lifestyle. Tapping into a portfolio on a declining value plane has an outsized impact since retirees need to sell investments with long-term growth potential at a time when their value is at its lowest. Fewer assets remain from which to strategically engineer growth and bring the portfolio back to a healthy level.

Sequence risk is often a matter of luck. Those who retire during a bear market may never recover the original account balance, regardless of portfolio diversification. Those who retire during a bull market may, conversely, find that the principal has grown enough to weather subsequent moments of risk. For one, their capital has had longer to grow. For another, they have a shorter period of years during which they need capital. Related to this, higher life expectancies heighten sequence risk: a 30-year retirement has a longer draw period and more chances of market volatility after earnings stop than a 20-year retirement.

While there is no foolproof way to avoid sequence risks, those approaching retirement do have options to limit the downside. One involves shifting the portfolio balance away from equities, which tend to be the most volatile of asset classes, as they track the stock market and amplify sequence risk. Instead of taking positions in stocks, one creates a personalized mix of shorter-term bonds and bond funds, as well as cash and cash investments.

A common feature of these holdings is that they are liquid and offer predictable returns over time, whatever the economic environment. Many advisors recommend aiming for a year’s worth of expenses at hand in cash investments (after accounting for income sources such as Social Security). Beyond this, maintaining funds that support an additional two to four years’ worth of expenses in the form of high-quality short-term bonds (or bond funds) helps minimize risk.

Another strategy involves proactively scaling back on either spending or withdrawals. Define what one can live without, whether entertainment or travel, or forgo adjustments for inflation. The aim here is to avoid liquidating equity investments while the market is down, and weather the storm, secure in the long-term upward trajectory of the portfolio.

The impact of this simple strategy is often substantial: for example, both Investor A and Investor B experience a 15 percent market decline in the first two years of retirement, which eats into their $1 million retirement portfolio. Withdrawing at a four percent annual rate, it takes Investor B some 28 years to recover assets to the original $1 million baseline. In fact, they do not live long enough to see that happen.

By contrast, Investor A requires only 11.5 years to reach this baseline by withdrawing just two percent from their retirement accounts each year. It makes their golden years much more comfortable and stress-free.

FAQs

What is sequence risk in retirement planning?

Sequence risk refers to the impact of the timing of market returns and withdrawals on a retiree’s long-term portfolio value, especially when losses occur early in retirement.

Why are early retirement market declines so damaging?

Early losses force retirees to sell investments when values are low, reducing the base from which future growth can compound, making recovery more difficult.

How can retirees reduce their sequence risk exposure?

Retirees can shift assets toward cash, short-term bonds, and other low-volatility investments to cover several years of expenses without selling stocks during downturns.

Does adjusting spending help protect retirement savings?

Yes. Temporarily lowering withdrawals – such as reducing discretionary spending – helps preserve principal and prevents selling during market declines.

Why does longevity increase sequence risk?

Longer lifespans extend the withdrawal period, increasing exposure to market volatility over time and heightening the risk of outliving savings.

About Gerard Dougherty

Gerard :Gerry: Dougherty is the president of Boston Independence Group, Inc., a retirement planning firm based in Massachusetts. With more than 30 years of experience, he helps clients create personalized financial strategies for sustainable retirement income.

A National Social Security Advisor and author of Uncomplicated Money, Mr. Dougherty also hosts the radio program Making Money Last and the podcast Retirement Is Within Reach. His work emphasizes education, financial independence, and long-term wealth preservation.