Sequence of returns risk in retirement is the extra damage a market drop does in your first withdrawal years, which Tolleson Wealth Management shrinks by trimming pay after a loss.
Most people assume the average return decides the outcome, but once withdrawals start the order decides it. In the hypothetical below, the same three returns left an $800K portfolio about $45K lower when the loss came first.
“If the market drops right after I retire, do I have to cut my life down to the bone?” That is usually the real question. A sensible answer starts before retirement, while you still have catch-up years, part-time earnings, and a choice about which dollars will fund the first few withdrawals.
The same returns can leave $45K less by year three
For illustration: Darnell, 62, keeps $800K of his $900K 401(k) invested and holds $100K in cash. He takes $48K at the start of each year while Fatima, 60, continues part-time bookkeeping. They need bridge income before deciding when to start Social Security, and Darnell is weighing a pension’s $400K lump sum against a monthly check.
Order A puts the loss first: minus 20 percent, then plus 10 percent, then plus 25 percent. The first $48K withdrawal leaves $752K invested; $752K × 0.80 = $601.6K. After the next withdrawal, $553.6K × 1.10 = $608.96K. After year three’s withdrawal, $560.96K × 1.25 = $701.2K.
Order B has the identical returns in a different order: plus 25 percent, plus 10 percent, then minus 20 percent. $752K × 1.25 = $940K. After the next withdrawal, $892K × 1.10 = $981.2K. After year three’s withdrawal, $933.2K × 0.80 = $746.56K. The gap is about $45K, although both return sequences produce the same 10 percent total gain: 0.80 × 1.10 × 1.25 = 1.10.
Order A hurts because the loss hits the account Darnell is living on. His second $48K withdrawal comes out of $601.6K, so it takes a bigger bite of what is left. That leaves fewer shares invested when the 25 percent year finally arrives. A fixed paycheck pulled from a falling account sells the most shares at the worst prices.
A 10 percent guardrail trim changes years two and three to $43.2K. After year one, $601.6K minus $43.2K leaves $558.4K; $558.4K × 1.10 = $614.24K. Then $614.24K minus $43.2K leaves $571.04K; $571.04K × 1.25 = $713.8K. The gap falls to about $33K. The trade-off is $9.6K less spending over two years, or $4.8K annually, about $400 monthly.
These returns are made up for illustration, not a forecast. A real investment account can fall below the amount originally invested, especially when sales occur during a weak market.
“My average return decides how long the money lasts”
Average return decides the ending balance only when no money goes in or out. Once you are taking a monthly paycheck, the loss-first row is where the answer flips: the same returns can leave less money because early withdrawals permanently reduce the shares available for a rebound.
A 20 percent loss needs a 25 percent gain to return to even. Pulling cash from the account while it is down makes that climb steeper. Tolleson Wealth Management starts from that gap when it sets the size of a client's first retirement withdrawals, and treats the average return as only one of the inputs.
| Common belief | What the rule says | What it means for you |
|---|---|---|
| Average return decides result | Order matters with withdrawals | Loss-first ended $45K lower |
| A 20% drop needs 20% back | A 20% loss needs 25% | Sell fewer shares after loss |
| Risk starts on retirement day | Window opens about five years before | Use $11,250 catch-up at 60–63 |
| Trimming pay is market timing | Guardrails change spending, not holdings | 10% trim recovered about $12.6K |
| RMDs are far off | Forced at 75 if born 1960+ | Down years still require sales then |
“Sequence risk starts when I retire”
Sequence risk usually begins to matter roughly five years before the last paycheck and lasts about ten years after the first withdrawal. At 52, a market drop can be useful because new contributions buy more shares at lower prices and there is time for compounding; at 62, the same drop may collide with withdrawals.
The catch-up years are the last inexpensive protection. For 2026, the IRS permits an $8,000 catch-up contribution in a 401(k) or 403(b) at age 50 or older. At ages 60 through 63, a higher $11,250 catch-up takes the place of the $8,000 if the employer plan permits it. Fatima could use that higher amount now, lowering the bridge income Darnell must take later.
As retirement gets close enough to plan around, growth stops being the only question. The first thing Tolleson Wealth Management looks at is which money will pay the first five years, including cash, part-time pay, pension income, and retirement accounts. That choice becomes part of the client’s playbook.
“Cutting pay after a drop is just market timing”
A guardrail trim changes the amount withdrawn after a loss; it does not require selling one investment and buying another because of a market prediction. The stock mix can stay in place while the household sells fewer shares at depressed values. That is a spending decision, not a market call.
The rule also works in the other direction. Following a strong year such as Order B’s first year, a guardrail can permit a raise. Your pay follows the portfolio within limits instead of staying locked to the number chosen at 62.
Before Tolleson Wealth Management raises or trims a client's pay, it checks the account funding the next withdrawal and the taxable income that sale creates. Money taken out of a pre-tax 401(k) counts as ordinary income in the tax year it comes out. A Roth conversion strategy, Medicare IRMAA planning, and Social Security claiming can affect which account makes sense next.
Can I ride out a bad first year on a fixed $48K?
You can keep a fixed $48K withdrawal after a 20 percent first-year loss, but a 10 percent trim or a cash reserve changes the amount left invested. For Darnell, the choice turns on whether the household can absorb about $400 less each month for two years and whether cash is available before the decline.
Keeping $48K fixed ends Order A at $701.2K and gives up no spending. It requires no preparation, but it absorbs the full loss-first gap. A 10 percent trim to $43.2K ends at $713.8K and gives up $9.6K over two years; the household only needs to agree on the trim amount while markets are calm.
Paying years two and three from the $100K cash set-aside preserves the invested account: $601.6K × 1.10 × 1.25 ends near $827.2K. But $96K of cash has been spent and must later be rebuilt. Cash can buy time; it is not a return source.
Use this quick test: if withdrawals in the first five years exceed 4 percent of the portfolio annually and guaranteed income covers less than half of spending, set a trim amount, such as 10 percent of the withdrawal, before the first bad year arrives. Darnell’s $48K withdrawal is 6 percent of $800K during the bridge years, so the issue deserves attention before the pension election or a 401(k) rollover to an IRA.
Do we even need a plan for this if a pension covers the basics?
The warning matters much less when a pension or Social Security check pays most fixed bills, withdrawals stay below about 3 percent of the portfolio, or part-time earnings cover the early years. Darnell fits the first case only if he elects the monthly pension check; taking the $400K lump sum adds another amount exposed to a bad first year.
A guardrail trim is a real pay cut, so a household with a mortgage or care costs that cannot move may need that pension income or set-aside cash to do more of the work.
From 60 to 75, six dates set the exposure
At ages 60 through 63, the 2026 IRS higher catch-up window allows $11,250 in a 401(k) or 403(b), if the plan permits it. Fatima is in that window now. At 62, Darnell leaves work, and his pension’s election deadline is set by the plan; ask the plan for the date in writing before deciding between the lump sum and monthly check.
At 65, Medicare eligibility begins. At 67, Social Security reaches full retirement age for people born in 1960 or later. Each month of delay past that point raises the benefit until 70. Those choices can reduce the amount that must come from investments during a weak stretch.
At 75, required minimum distributions begin for people born in 1960 or later; people born earlier start at 73. An RMD forces a taxable withdrawal from pre-tax accounts such as a 401(k) or traditional IRA, even in a year when markets are down. Retirement income planning should put these dates in order before the first withdrawal is due.
A $195.6K cash-out error in the first five years
Moving everything into cash right after the year-one drop is a timing mistake. In Order A, holding cash through years two and three leaves $505.6K ($601.6K minus $48K minus $48K). Staying invested would have left $701.2K. The roughly $195.6K difference comes from selling after the loss and missing the recovery.
Claiming Social Security at 62 in a panic to stop withdrawals creates a different long-term cost. For someone whose full retirement age is 67, the check is about 30 percent smaller than at 67 for life. The decision may still be necessary for a particular household, but it should not be an automatic response to one bad year.
Adding a $400K pension lump sum to stocks immediately before withdrawals start also expands the amount that can be hit first. Tolleson Wealth Management would settle where that money sits before the rollover lands, then show how it affects the withdrawal guardrails. A pension election often cannot be treated like a routine investment trade.
What I can check alone and what to bring to Tolleson Wealth Management
You can calculate your first-year withdrawal rate and rerun Darnell’s three-year math using your own balance. Choosing a trim size, placing pension money, and deciding which account pays during a down year are worth an hour with a Tolleson Wealth Management wealth advisor.
Questions about a sequence of returns risk in retirement
How many years before retirement should I start guarding against a bad first year?
Does taking my pension as a monthly check instead of a lump sum lower sequence risk?
If we trim withdrawals after a down year, can we raise them back later?
Where the rules come from
This is general information, not personalized investment, tax, or legal advice. Investing involves risk, including possible loss of principal. Talk to a financial professional before making decisions about your money.