The first five years of retirement carry a risk most savers never hear about until it is too late: sequence-of-returns risk. Two retirees can earn the same average return over 25 years and end up with very different outcomes, simply because one of them met a bear market in year one.
Why the order of returns matters
While you are saving, a market drop is an opportunity to buy shares at lower prices. Once you start withdrawing, the same drop forces you to sell more shares to fund the same spending, and those shares are no longer there when the market recovers.
Three ways to reduce the risk
- Hold two to three years of planned withdrawals in cash and short-term bonds.
- Use spending guardrails that trim withdrawals after a bad year.
- Delay Social Security so a larger guaranteed income covers essential expenses.