How to Manage Sequence of Returns Risk in Retirement

One of the most significant sources of financial uncertainty for retirees is the fear of substantial negative returns early in retirement. This is often called the sequence of returns risk. When retirees withdraw money from their investment funds, negative returns early in retirement can cause the starting principal of their portfolio to fail faster than if the negative returns occurred later. This can affect their withdrawal strategy, ongoing withdrawals, retirement savings, and withdrawal rates.

how to protect against sequence of returns risk

The sequence of returns risk in the beginning early years can be a significant threat and significant longevity risk. However, being aware of the sequence of returns risk early on and implementing a correction strategy can help preserve an investment portfolio.

Here are four tips on how to manage the sequence of returns risks in retirement:

  1. Spend conservatively
  2. Maintain spending flexibility
  3. Manage volatility
  4. Buffer assets—avoid selling at losses

After reading this article, you’ll learn multiple easy-to-follow techniques that will ensure you manage the sequence of returns risk and protect your retirement.

1. Spend Conservatively

The first tip for managing the sequence of return risks in retirement is to spend conservatively. Spending conservatively does not mean you have to deprive yourself of the things you enjoy most. It just means that you have to be thoughtful about what you spend. There are many actionable steps to practice living below your means where you won’t notice a lifestyle deprivation.

You worked very hard to save for retirement, and you want to enjoy it, but if you spend too much, your risk is being left with a shortfall later in retirement, which could put your family and loved ones in a difficult position later in life. 

Some retirees even go back to work because of an ill-planned retirement portfolio and lack of spending discipline. Retirees should keep their spending consistent on an inflation-adjusted basis throughout retirement. 

Be Disciplined About Withdrawals

The most common mistake financial advisors see with retirees is overspending. Overspending can lead to poor investments made out of desperation, leading to an even worse position. There are many 401k advantages and disadvantages for employees that affect portfolio pots.

If you spend heavily and too much of your retirement savings then lose even more of it by trying to gain back in the stock market quickly, you may end up running out of funds faster than you think.

To avoid this, retirees need to be very disciplined in spending habits. Don’t take out more than you have budgeted, and try to take a minor withdrawal or skip a withdrawal occasionally. This may not seem like it makes a big difference, but over decades it adds up.

The 4% Rule

According to Charles Schwab, many retirees adhere to the 4% rule: you add up all of your investments and withdraw 4% of the total during the first year of retirement. After that, you adjust the dollar amount for inflation.

For example, if your retirement portfolio totals $2 million, you would withdraw $80,000 in your first year of retirement. In the second year, you adjust for inflation. So, if the cost of living rises 2%, you would give yourself a 2% raise the following year on top of your 4% withdrawal rate. You’d do this each year for the rest of your life. Knowing how to deal with lifestyle inflation can keep your living costs low.

Most investors advise that this formula creates a very high probability that you will not outlive your retirement savings. Using this formula maximizes the chances of being comfortable all through retirement. 

how to avoid sequence of returns risk
You can avoid sequence of returns risk by following the 4% withdrawal rule

While this rule has worked well for many retirees, there are a few caveats to the 4% rule.

It’s Rigid

The 4% rule assumes you increase your spending every year no matter what, regardless of how your portfolio performs.

This can be a challenge for some investors. It also assumes that you have fixed expenses year to year. Most retirees will need to spend more or less depending on the year – maybe there is a wedding one year, but you spend less the following year. Expenses change, so the amount of money you spend each year will change. 

It Applies to a Specific Type of Portfolio

The rule generally applies to a portfolio invested 50% in stocks and 50% in bonds. Your actual portfolio composition and investment objectives may look different, and you may decide to change your investments in the future. For example, you may be trying to decide on investing in options vs. futures.

If you have a portfolio invested more conservatively or more aggressively, you should work with your financial advisor or certified financial planner about an alternative to the 4% rule.

It’s Based on Historical Market Returns

While historical investment returns have been relatively steady over time, some market analysis suggests that the sequence of returns for stocks and bonds over the next decades are expected to be lower. If this turns out to be accurate and investment returns occur at lower return rates, the 4% withdrawal rule may be too high to sustain you through retirement. 

It Assumes the Need for 30 Years

The number of years you will need to fund in retirement depends on many factors, including age, health, location, and more. It also depends on what age you are when you retire.

In addition, the Social Security Administration estimates that the average life expectancy of people turning 65 today is less than 30 years. Depending on your age, 30 years may not be needed or likely. Of course, you should always plan for a long retirement, but if you are already 65 or older, your time horizon may not be 30 years. 

In addition to these caveats, some research has illustrated that the 4% rule may not be as effective in the future. The biggest reason for this is past performance does not guarantee future performance.

Low-interest rates and overvalued stock markets could contribute to slower growth, meaning a 4% withdrawal rate may be too high to last through retirement. 

So how can you spend conservatively? It is a good idea to take a withdrawal of 2.5% or 3% to increase your chances of making your money last a lifetime. Also, remember that you don’t have to spend what you take out! If you don’t use all 2 or 3% of your withdrawal for the year, you can reinvest it in your portfolio to help reduce the sequence of returns risk and extend its life. 

Additionally, there are ways to retire on 500k, which also reduce your sequence risk.

Alternatives to the 4% Rule

One alternative to the 4% rule is aiming for a higher than average withdrawal rate, like 5% or 6%, but taking a “pay cut” when the market is not performing well.

This strategy can be an effective way to allow you more income when the market is performing. However, taking a pay cut during down years is not easy for everyone, and suddenly scaling back your spending can be difficult.

Another alternative to the 4% rule is the “magic number” calculation. This is a calculation done by an investment firm that uses market indices to determine a withdrawal rate that is likely to yield your target yearly expenses without running out in 30 years. Historical investment returns occur in cycles, so there is no guarantee that the market will provide these average returns in the future.

sequence of return risks
Alternatives to the 4% withdrawal rule include utilizing a 3.3% withdrawal rule which is popular within the FIRE community

The 3.3% withdrawal rate is gaining in popularity to minimize the sequence of returns risk.

2. Maintain Spending Flexibility

It’s an excellent idea to minimize fixed costs as much as possible during retirement to have spending flexibility if your portfolio hits a rough patch. In this situation, you can decrease spending, allowing more money to remain in your portfolio to recover losses.

If you have a lot of fixed costs without the flexibility to occasionally take a lower withdrawal rate, you risk running out of money if the market does not perform well. 

You can do several things to allow yourself more spending flexibility during retirement. 

Pay Off Large Loans Before Retiring

It’s best practice to put off retirement until large loans like mortgages and student loans are paid off. Other significant expenses like weddings should also be accounted for. Ideally, even smaller loans like car payments and personal lines of credit should be paid off before retirement. 

Whether outstanding balance vs. principal balance, paying off these expenses eliminates the need to use your hard-earned retirement funds for these fixed costs and gives you greater flexibility if you need to suddenly spend more or less in retirement. 

Create a Conservative Budget

Having a budget is one of the most critical pieces of retirement planning. Without a budget, you won’t stick to a consistent withdrawal rate and plan for the next 20-30 years. It’s even better to have a conservative budget. 

A conservative budget means you have plenty of breathing room for unexpected expenses, rainy day funds, and more. 

Budgeting conservatively doesn’t mean you have to deprive yourself of vacations, nights out, or other enjoyable retirement activities. It just means you have to balance and be mindful of how you are spending. 

If you live on a conservative budget and suddenly experience portfolio loss, you will be able to decrease your spending in the short term quickly. 

3. Manage Volatility

The last thing you want in retirement is to lose a big chunk of your nest egg due to volatility in the market. According to Investopedia, volatile markets can put a damper on years of otherwise diligent retirement planning.

Even the most experienced investors can’t predict sudden events that could throw the market – think 9/11, the pandemic. No one could have predicted these events, and they can have devastating impacts on the market and your portfolio. 

There are several things you can do to manage volatility. 


Diversification is an effective investment strategy that will help isolate the sequence of returns risk, protect your investments, and avoid significant losses. However, a diversified portfolio isn’t as simple as spreading your money around.

You need to be thoughtful in the ways you diversify and thoroughly consider the upside and the downside to each option. Investors have developed sophisticated strategies for diversification, and several strategies may work for you.

Invest in Real Estate

Real estate can benefit retirement income portfolios if employed appropriately as an asset class. Real estate has historically been a high-yield asset class. Whether commercial buildings, single-family homes, condos, or townhouses, these assets have consistently appreciated, often outpacing the market. 

There are many options, from local real estate to buying houses or apartments for rent. There are also publicly traded or non publicly traded real estate investment trusts (REITs) worldwide.

  • Moreover, you can try different properties available for investment, including office buildings, shopping centers, and industrial buildings. You can also easily invest in real estate crowdfunding platforms as a way to be hands-off investing. These assets can offer lifetime income streams and have upside potential to the bad sequence of returns on a portfolio.

It’s essential to keep in mind the disadvantages of real estate. For example, it can be hard to convert this asset to cash if needed. If the market takes a downturn and people are no longer buying real estate, you may be stuck sitting on your property for a while. For this reason, REITs are an attractive option when looking to diversify your portfolio through real estate. 

Fixed Indexed Annuities

Fixed indexed annuities (FIA) are contracts between insurance companies and investors. These are an excellent alternative to bonds or bond funds as they allow you to gain tax-deferred growth and protect you from market risk while also providing you with a regular stream of income. 

Because Insurance companies issue FIAs, they’re more protected than other asset classes and can capture market gains while avoiding market losses. FIAs can be complex and expensive if not implemented properly. In addition, they also have limited liquidity, meaning you aren’t free to spend the investment at your leisure. 

FIAs are an excellent way to diversify your investment but must be done carefully so that you fully understand the commitment. It’s best to consult with a financial advisor or wealth manager before investing in FIAs.


Bucketing is another effective strategy to manage volatility. Bucketing means moving some of your assets into low-risk investments like bonds but leaving the rest of your funds invested more aggressively.

  • This is a smart strategy because you don’t want to have all your assets in high-risk stocks. If you do, and the market takes a turn, you could take a massive hit to your overall portfolio. 

Bucketing part of your assets protects your retirement even in difficult economic times. On the other hand, you don’t want to be too conservative. While it may seem attractive to move the bulk or all of your assets into low-risk investments, doing this could mean you miss out on potential growth and end up in a worse position.

Another way to feel more comfortable with leaving funds invested more aggressively is keeping a year’s worth of expenses in cash, as well as five years in investments that can easily be liquidated. This way, even if the market does take a hit, you have a substantial cushion to help you recover.


Another way to create certainty in your portfolio is rebalancing. Rebalancing means regularly analyzing your investment holdings then adjusting to the original allocation. Rebalancing could be considered a retirement leverage ratio to some degree. This ensures that your distribution stays the same, regardless of your withholdings.

If you don’t rebalance, after a few years, your portfolio may be invested significantly different than it was at the outset. Monthly and quarterly assessments are generally reasonable intervals to rebalance. Even letting your portfolio go a year without rebalancing carries risk.

4. Buffer Assets—Avoid Selling at Losses

The final way to manage the sequence of returns risk in retirement is to avoid selling at losses. If all of your retirement is in the market, you may be forced to sell at an inopportune time because you rely on these investments for cash flow. 

In an ideal world, you should avoid selling at a loss at all costs. You can do this by having assets available outside the market in the case of a market downturn. This way, you won’t be reliant on your investments for income, so you won’t have to sell at a loss if the market is down. 

The most common way to do this is to maintain a cash reserve separate from the retirement investment portfolio. A cash reserve allows you to leave your investments in the market and recover, rather than withdrawing them as a loss.

The downside to keeping a cash reserve on the side is the potential lost revenue from investing it and yielding a return.  

Home Equity

Another way to avoid selling at losses is to leverage the equity in your home. Census data from 2015 show that the average 65-year-old couple had about two-thirds of their wealth invested in their home. That makes home equity one of most Americans’ most significant retirement assets. 

You worked hard to pay off your home, and you can leverage it during retirement if you need to. Your home can be a possible asset to generate income; you can use it to downsize and free up equity or borrow against it and use those funds for day-to-day expenses. 

According to the Financial Planning Association, using a line of credit or reverse mortgage against your home is an excellent way to gain access to cash during a market downturn so that you don’t have the need to sell your investments at a loss. There’s even research showing that incorporating reverse mortgages into a retirement strategy can improve total wealth and increase the longevity of retirement investments. 

There are potential downsides to this strategy, however. There are costs associated with tapping into home equity, and the structure of specific deals can create potential risk. Understanding the cost structure is essential before tapping into your home equity. 

Does Order of Return Matter in Sequence Risk?

Yes, the sequence of returns can have a major impact on your overall portfolio. As the sequence of returns plays out over time, it’s important to understand how the sequence risk can affect your retirement planning.

The sequence of return risk is the probability that you will withdraw funds early from your investments. You may also encounter negative returns during this time, also known as the sequence of returns.

what is sequencing risk in retirement

If you retire in a recession, for example, and have to start ongoing withdrawals, it can have an impact on your nest egg and your overall portfolio. The sequence risk comes from the sequence when you start your initial withdrawal rate. Your investment expected returns risk becoming negative and could derail your retirement plan.

Key Takeaways of Managing the Sequence of Returns Risk in Retirement

Planning for retirement can be a daunting task that creates stress and uncertainty. That’s why it’s critical to manage the sequence of return risk in retirement. An effective management strategy will ensure that you have enough savings to get you through retirement and enough money to enjoy your retirement. Although hiring an accountant or certified financial planner can help navigate these waters.

These key strategies will give you the best chance to maximize your retirement savings and help prevent a sequence of return risk:

  • Have a disciplined budget and spend conservatively.
  • Pay off large loans to maintain spending flexibility.
  • Reduce Volatility by diversifying your assets.
  • Avoid selling investments at losses at all costs.

BG Vance

After starting over financially in mid-life, I decided to share my experience and financial lessons learned with others. I have over two decades worth of professional and personal financial experience helping individuals and families in all stages of life realize their financial dreams. More about me...

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