Retirement Planning: Sequence-of-returns risk — why market timing matters more than you think

A market crash is not the same event at every age. When it happens — not how bad it is — is what determines whether your retirement survives it.

A market crash is not the same event at every age. When it happens — not how bad it is — is what determines whether your retirement survives it.

What sequence-of-returns risk is

Most retirement projections assume your portfolio earns an average return each year — say, 7% — smoothed evenly across decades. The real world does not work like that. Markets deliver their returns in a lumpy, unpredictable sequence: some years up 20%, some down 30%, some flat. Over a long accumulation period, this averaging effect largely holds. But at the moment you retire and start drawing money out, the sequence in which those returns arrive begins to matter enormously.

Sequence-of-returns risk is the danger that poor returns arrive early in your retirement, when your portfolio is at its largest and you are making the most significant withdrawals relative to the whole. If that happens, you are selling units at depressed prices to fund your living expenses — and those units are never available to participate in the recovery.

Why it matters

Two retirees with identical portfolios, identical withdrawal rates, and identical average returns over 30 years can end up in completely different financial positions solely because one experienced the bad years early and the other experienced them late.¹

Consider a $500,000 portfolio with 4% annual withdrawals ($20,000 per year). A 30% crash in year two of retirement — before the portfolio has had time to grow — reduces the base on which all future compounding occurs. Worse, ongoing withdrawals during the trough mean selling more units to raise the same cash. By the time markets recover, the portfolio is structurally smaller than it would have been if the same crash had occurred at year 15 or year 20.²

The gap in ending balances is not caused by different average returns or different crash sizes. It is caused entirely by timing. A crash at 60 — right at retirement — hits the portfolio at the moment withdrawals begin, compounding the damage across decades of drawdown and leaving $3.6M, 49% below baseline. A crash at 75 hits a portfolio that has had 15 more years to grow, and with fewer withdrawal years remaining there is simply less time for the damage to compound, leaving $4.4M at age 100, or 36% below baseline. This is a static illustration of exactly what you can model for your own numbers in the Wealthspan Market Crash scenario.

Research modelling this effect consistently finds that retiring into a bear market — even one followed by a full recovery — can cut terminal portfolio value by 50% or more compared with retiring into a bull market, even when lifetime average returns are identical.³ The 2000–2002 technology crash and the 2008–09 financial crisis both created cohorts of early retirees whose portfolios were permanently impaired not because markets never recovered, but because the sequence was wrong.

This is why blanket average-return projections can be dangerously optimistic. A projection showing you arrive at 100 with $3 million assumes markets cooperate in the right order. Sequence risk is the hidden variable those projections do not show you.

Who is most exposed

Sequence-of-returns risk is most acute in a specific window: roughly the five years before retirement and the five years after it. This decade is sometimes called the "retirement red zone."⁴

During accumulation, a crash is painful but not fatal — you are not selling to fund living expenses, your contributions continue buying units at lower prices (dollar-cost averaging works in your favour), and you have decades for compounding to repair the damage.

Once you are drawing down, the dynamic reverses entirely. Each withdrawal crystallises a loss. Pound-cost averaging no longer protects you — it works against you, because now you are selling more units at low prices rather than buying them. And with a finite time horizon, you may not have enough runway for a full recovery.

People in the accumulation phase are not immune — a crash that coincides with a planned large purchase or early retirement decision can still cause real harm — but the risk is concentrated in drawdown.

How to stress test your own projection

The Wealthspan widget includes a Market Crash scenario that lets you model this directly against your own numbers. Here is how to use it deliberately rather than as a random what-if:

Step 1 — Turn on the Market Crash scenario. In the Wealthspan widget, scroll to the What If? Scenarios section and activate the Market Crash card. Set the portfolio drop to a figure that reflects a realistic bear market — 30% is a reasonable baseline; 2008–09 saw the S&P 500 fall approximately 57% from peak to trough.⁵

Step 2 — Test the timing. Use the Years Until Crash control to shift when the drop occurs. Start with 0 (immediate) and observe the projected portfolio at age 100. Then move it to 5 years, then 10. Notice how the outcome changes — a crash at retirement is typically far more damaging than the same crash a decade later, even though the percentage drop is identical. This is sequence risk made visible in your own numbers.

Step 3 — Ask the critical question. Does the scenario line stay above zero across your projected lifetime? If it dips below zero — meaning the portfolio is exhausted before age 100 — that is a signal worth taking seriously, not a reason to panic.

Step 4 — Adjust the other levers. If the result concerns you, try changing the other scenario variables. Retiring two or three years later, or reducing projected spending modestly, can meaningfully offset the impact of a crash at the wrong moment. The scenarios are designed to be used together — mix and match to find a plan that holds up under pressure.

Step 5 — Talk it through. If the results still concern you after experimenting with the variables, the AI Coach can help you think through what it means for your specific situation — whether the risk is real given your income sources, what levers remain, and what steps are worth discussing with a financial adviser.

How to reduce your exposure

• Build a cash buffer before retirement — holding 1–2 years of living expenses in cash means you are not forced to sell investments at depressed prices in the early years of a downturn. This is sometimes called a "cash bucket" strategy.
• Consider a flexible withdrawal rate — rather than a fixed annual withdrawal, build in the ability to reduce spending modestly in a bad year. Even a 10–15% reduction during a crash can meaningfully extend portfolio longevity.
• Diversify across asset classes — a portfolio that includes bonds, cash, and assets that do not move in lockstep with equities is less vulnerable to a single crash event at the wrong moment.
• Continue contributing through volatility — if you are still in accumulation, do not stop contributions during a downturn. Lower unit prices mean each contribution buys more.
• Delay full retirement if timing is bad — one or two additional working years at the start of a bear market can allow a recovery to take hold before drawdown begins. The timing of retirement is one of the most powerful levers available.
• Know your fixed income floor — state pension (UK), Social Security (US), or a defined-benefit pension provides income that does not depend on portfolio performance. The larger your fixed income floor relative to your spending, the less exposed you are to sequence risk, because you are not drawing as heavily on the portfolio during bad years.
• Run the stress test periodically — sequence risk is not a one-time calculation. Run the Wealthspan Market Crash scenario at least annually, and always after a significant market fall. What the numbers show at 55 will look different at 62.

100 Great Years perspective

Sequence-of-returns risk is one of those concepts that sounds technical but is actually a very human problem — it is about the collision between the randomness of markets and the fixed reality of needing income at a particular point in your life. 100 Great Years is not here to tell you how to maximise your portfolio or predict what markets will do. It is here to help you see your financial picture clearly enough to make good decisions. The Wealthspan stress test is not meant to frighten you — it is meant to give you an honest view so that if the numbers concern you, you can act now rather than discover the problem later. A retirement plan that survives a bad sequence is a more robust plan, and building that robustness is worth the work.

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This article is for educational purposes only and does not constitute financial advice. Past performance is not a reliable indicator of future results. Always consider your personal circumstances and consult a qualified financial adviser before making investment decisions.