Despite Average Market Returns, Why Didn’t My Retirement Savings Hold Up
If you're planning to retire in the next five years, financial independence means more than just hitting a magic number in your retirement accounts. It’s about ensuring that your savings can last throughout retirement—regardless of how markets perform. One of the most overlooked yet critical risks that can undermine even the best-laid plans is the sequence of return risk. Understanding and addressing this risk is essential for anyone approaching retirement.
What Is Sequence of Return Risk?
Sequence of return risk refers to the impact that the order of investment returns has on your retirement portfolio, particularly once withdrawals begin. It’s not just the average rate of return that matters, it’s also when the gains and losses happen.
If markets decline early in retirement while you’re drawing from your portfolio, the combination of withdrawals and losses can cause lasting damage. Even if markets recover later, the depleted portfolio may not have enough left to benefit from that rebound.
Why This Matters Now
Market volatility, uncertain interest rate policy, and long-term questions around Social Security and Medicare funding make this a particularly vulnerable time for near-retirees. For those within five years of retirement, preserving capital and planning withdrawal strategies is more critical than ever.
A Simplified Illustration
Let’s compare two retirees, Mr. Wang and Mr. Chen. Each starts retirement with $1,000,000, withdraws $60,000 annually (6% of the account value) in the beginning of the year, and experiences an average annual return of 6% over 25 years. The only difference? Mr. Wang experiences poor returns early in retirement, while Mr. Chen sees them later.
Year Mr. Wang’s Return Mr. Chen’s Return
1 -15% +27%
2 -10% +22%
3 -5% +17%
4–21 6% (each year) 6% (each year)
22 +17 -5
23 +22% -10%
24 +27% -15%
25 6% 6%
Results after 25 years:
- Mr. Wang runs out of money in year 17.
- Mr. Chen ends retirement with more than $1,200,000.
Despite the same average return and withdrawal strategy, the sequence of market performance makes a significant difference.
What You Can Do
You cannot control markets, but you can control your approach:
- Segment your assets: Keep 1–3 years of withdrawals in cash or low-volatility assets to avoid selling stocks in a downturn.
- Stay flexible: Adjust spending in response to market conditions to reduce strain during poor-performing years.
- Delay income where possible: Postponing Social Security or working part-time can reduce early reliance on investments.
- Test your plan: Run scenarios that include negative early returns to evaluate how resilient your retirement strategy really is.
Final Thoughts
Securing a successful retirement isn’t just about accumulation, it’s about preservation and distribution. The sequence in which returns occur can have lasting effects on your financial stability, especially during the early years of retirement. Now is the time to move beyond general rules of thumb and implement a personalized, risk-aware strategy. For those nearing retirement, proactively managing sequence of return risk is not just prudent—it’s essential to protecting the independence you’ve worked so hard to achieve.
Securities offered through Registered Representatives of Cambridge Investment Research Inc., a broker-dealer, member FINRA/SIPC. Advisory services through Cambridge Investment Research Advisors, Inc., a Registered Investment Adviser. Cambridge does not offer tax or legal advice. Cambridge and American Financial Alliance, Inc. are not affiliated.