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One of The Biggest Risks in Retirement

Investing Retirement Funding Insights Taxes

The truth is, there are many risks in retirement. Most commonly, you hear about inflation or running out of money. But, in today’s world with the way markets behave, the biggest risk you should be on the lookout may not be what you think. Market corrections happen more often than you think, and if you are withdrawing money for your retirement during a downturn, it could have massive consequences down the road.

What we are talking about is known as sequence of returns risk. You have most likely never heard of this term, and it is just as likely, you did not know it was hiding in plain sight, just a bit further down the road in retirement. To demonstrate this in a simplistic way, we use the graphic below called: 


“The Money Cycle” is something we all go through during our lives.  Everyone you know is going through it, your family members, your friends, and your coworkers. It boils down to three distinct phases: The Accumulation, Preservation, and Distribution phases.

The Accumulation phase usually starts with your first job. You are young, and for the first time you are bringing in money. During this time, you begin to save and invest money for your future. Those investments are long-term; therefore, you do not have to worry about market volatility or a market crash as you have plenty of time to wait for the market to come back. The Accumulation phase lasts for most of your adult, working life.

In the late stages of your working life, you being to enter the Preservation phase. In this phase, you begin to protect or preserve a portion of the assets and resources you have accumulated throughout your lifetime. As your retirement runway is getting shorter, you cannot make the same mistakes you made as a young adult. You do not have the time to weather market volatility. You are going to need this money sooner rather than later when you enter your retirement.

Once you decide to retire, you enter the Distribution phase. In this phase, you will begin to live off the assets you have accumulated and preserved during your working life.  You will generate income from those assets and eventually, after you pass, those assets will then be distributed to your loved ones.

A Common Retirement Mistake

Unfortunately, many people skip over the Preservation phase and go from Accumulation straight into Distribution. Their investments are still set up as if they had 20+ years left before they retire. The reality of the situation is they are knocking on the door of retirement or worse, already retired. 

You may be thinking, “So what? Why can’t we invest for growth while in retirement?” 

The problem occurs when you are taking distributions from these accounts and there is a major market correction – which we know there will be. Essentially, you are forced to sell your investments while they are less valuable, because you need income. Now you no longer have the chance to make that money back because you have cashed out. This could cause you to exhaust your retirement savings much faster. This is what we call the sequence of returns risk.


Sequence of returns risk is an idea centered around the relationship between how your investments perform and when you withdraw money from those investments. This relationship becomes ultra-important during retirement for a host of reasons. For instance, things like, market risk, interest rate risk, and unforeseen expenses can cause a negative sequence of returns.

The following table demonstrates the dramatic effects the sequence of returns can have during the Accumulation and Distribution phases.

We have created two fictitious clients: Ms. Happy and Mr. Unhappy. (Spoiler alert – Ms. Happy does better in the long run.) 

Accumulation Phase Key Facts:

  • They both start with $100,000 in an investment
  • Both Average 6% growth
  • No Withdrawals
  • Sequence of Returns are the exact opposite

Source: Clarity 2 Prosperity, LLC - This graphic looks at the effect the sequence of returns can have on your portfolio value over a long period of time. Other factors that may affect the longevity of assets include the investment mix, taxes, expenses related to investing and the number of years of retirement funding (life expectancy). This is a hypothetical illustration. This illustration assumes a hypothetical initial portfolio balance of $100,000, annual withdrawals with no adjustments for inflation and the hypothetical sequence of returns noted in the table. These figures are for illustrative purposes only and do not represent any particular investment, nor do they reflect any investment fees, expenses, or taxes. 

The chart above lists the sequence of returns for a hypothetical 10-year period of time. We are looking at a $100,000 portfolio with an average return of 6% over that 10-year time-frame. For the sake of simplicity, we are going to assume that there are no contributions to the portfolio, nor are there any withdrawals from the portfolio. 

As you can see, Ms. Happy receives great returns in the first couple of years, up 30% and up 20%. There is 6 years of 10% returns and then in the last two years, she receives some very bad returns, down 20% and down 30%. Mr. Unhappy had the exact opposite returns.

By the end of that 10-year period both of their portfolio’s grew from $100,000 to $154,764. This tells us that during the Accumulation phase, sequence of returns does not matter. The minute you retire and begin to withdraw income from your portfolio, everything changes.

Distribution Phase Key Facts:

  • They both start with $100,000 in an investment
  • Both Average 6% growth
  • $6,000 annual withdrawal
  • Sequence of Returns and the exact opposite

Source: Clarity 2 Prosperity, LLC 

Both scenarios are from the same exact period with the same percentage returns. The only difference now is they are in the Distribution phase and withdrawing annual income of $6,000 from the portfolio to live on. Still the same 100,000, and still the same average annual return of 6%.

The first portfolio starts like before with great years in the beginning and the two bad years at the end. After the 10-year period, Ms. Happy was able to withdraw $60,000 of income and still grow the portfolio value from $100,000 to $105,000, not bad!

Unfortunately for Mr. Unhappy, when you flip the sequence of returns and you start with the bad returns in the first few years, he was never able to recoup those losses.  In fact, his portfolio value after the 10-year period was worth almost 2/3’s less than Ms. Happy, even though they both had the same average return and withdrew the same amount of money.

The chart shows a great example of the ruinous effect a negative sequence of returns can have on your account value for the portion of money you are going to need in the early stages of your retirement.

There are many issues that can cause sequence of returns risk. For instance, needed income, unexpected expenses, and even forced income like required minimum distributions. When we think about structuring a retirement plan, we think about it in three simple buckets.  We call it “The Bucket Plan”.


We use the Now, Soon and Later buckets to fund your retirement and avoid the sequence of returns risk.

The first is your safe and liquid bucket (Now).  In an ideal world, this bucket holds the amount to cover 12 months’ worth of bills. As well as an amount that we call your “Magic Number”. This means, the amount you set aside for an emergency or it could be the certain amount of money that you would need in the bank to help you sleep at night. Finally, this bucket contains the amount for planned expenses – things like a new car, kitchen, or any big-ticket items.

This money is kept in the bank. We understand that we are not going to get much return on those dollars, but we are willing to accept that for the liquidity and peace of mind the bank offers.

The Soon bucket and the Later bucket are the buckets to focus on while investing for retirement. 

The Soon bucket, is invested for growth to offset inflation. It is invested conservatively. If there is a downturn in the market, it will not impact the money you will need for income in the early years of your retirement. We also coordinate RMD distribution planning into your retirement plan. We incorporate enough money into the Soon bucket to ensure you never have to take RMD’s out of a market driven account during a down market.

You can think about the Soon bucket as preserving your money to really get you through those first few years of retirement.

Now that your Now and Soon buckets are set, we can work on your Later bucket. In this bucket, we aim for a long-term time horizon geared towards long term growth and legacy planning. If you think about it, long term growth makes a ton of sense. We need to grow your wealth and maintain your purchasing power in and through retirement.

You might see legacy planning and think, “The kids are grown, they have jobs, we’re not too worried about leaving a legacy.” But from our perspective, legacy planning is not just for the kids. Honestly, it is more important for the surviving spouse. If you have a married couple in retirement and unfortunately one of them passes away, typically the surviving spouse's income will go down.

That is because they may have been eligible for two social security paychecks before, now they lose the lower of the two. The real kicker is that they go from being married filing jointly for taxes to now being a single filer. As you can see, it is important to think about all aspects of each bucket.


The good news is, we can help you avoid the risk’s outlined above. Working with our comprehensive advisors, you will go through the process of identifying the risks discussed, as well as many others not mentioned, to build a plan that will curtail as many of those risks as possible. We want to help you live a long worry-free retirement. 

Looking to take the next step? Book a free 20 minute introductory call:

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About the Author

James M. Comblo , CFF
is a Partner and the Chief Compliance Officer at FSC Wealth Advisors. His greatest passion in the financial services industry is helping clients accomplish their dreams both with investments and their personal lives. To learn more about him click here.