Lesson 38: Sequence Risk

The Timing of Returns Matters More Than the Average

Last week, we looked at how withdrawals work and why the order you take money from different accounts affects your outcome.

This week, we’re focusing on something less intuitive. Not just what your investments earn, but when they earn it.

Two people can have the same average return over time and end up in very different positions depending on when gains and losses occur.

That difference becomes critical once withdrawals begin.

Why This Matters

While you are saving, market ups and downs matter, but they tend to even out over time as you continue contributing.

Once you start withdrawing, that changes.

If the market declines early in retirement and you are taking withdrawals at the same time, you are locking in those losses. You are selling assets when they are down, leaving less invested to recover when the market improves.

If strong returns happen early instead, the outcome can look very different, even if the long-term average return is the same.

This is what sequence risk refers to.

It is not about predicting markets. It is about understanding how timing interacts with withdrawals.

What Breaks Without It

Without accounting for sequence risk, withdrawal decisions are often made as if returns arrive evenly over time.

That can lead to overconfidence in how long a portfolio will last.

If early losses are combined with ongoing withdrawals, the portfolio may decline faster than expected. Even if markets recover later, there is less capital left to benefit from that recovery.

This creates pressure to adjust spending, change investments, or make reactive decisions at the wrong time.

The issue is not the market itself. It is the combination of withdrawals and poor timing.

The Reframe

Sequence risk is not something you eliminate. It is something you plan around. The focus shifts from trying to avoid downturns to making sure your system can absorb them. That often means separating your assets by time horizon.

Some portion of your money is positioned for near-term income, where stability matters more than growth. Another portion remains invested for longer-term growth, where short-term fluctuations are less critical.

This creates flexibility.

If markets decline, you are not forced to sell long-term investments at the worst time to meet immediate needs.

This Week’s Move

Take a high-level look at how your assets are positioned today:

• Identify what portion of your savings would be used for near-term spending
• Identify what portion is intended to remain invested for longer-term growth
• Consider whether you would have flexibility if markets declined and you still needed to withdraw

Then think through a simple scenario:

• If markets dropped early in retirement, where would your income come from
• How long could you avoid selling growth-oriented investments

You are not trying to solve sequence risk this week. You are making sure your system does not depend on perfect timing to work.

Next week, we’ll step back and look at a broader question – how to think about the timing of retirement itself, and why the idea of a single “retirement date” is often too rigid to be useful.