Sequence of Returns Risk

Your financial advisor probably tells you to focus on "average returns"—7% a year, they say, like clockwork. But here's what they don't mention: when those returns happen matters more than the average itself.

Picture this: Two retired teachers, both with $800K saved. Same 7% average returns over 15 years. One ends up with $1.2 million. The other? Broke by year 13. Not because they did anything wrong—but because one of them retired right before a market crash. That's sequence of returns risk, and it's the hidden killer for workers like you who've saved half a million or more.

If you're 55+ and you've worked hard to build a $500K-$1M nest egg, this is the risk that should keep you up at night—not because you should panic, but because you can actually protect against it. Most people find out about sequence risk the hard way. Let's make sure that's not you.

Let's look at two retirees who both have $1,000,000 and withdraw $50,000 per year. Both experience the same returns over 15 years—just in different order:

Both retirees experienced the same mathematical average return. But Retiree B faced a crash early—while withdrawing $50,000 per year. Those early withdrawals at low prices depleted shares that could never recover.

During the accumulation phase (when you're saving for retirement), sequence of returns doesn't matter much. In fact, crashes are beneficial—you buy more shares at lower prices.

But everything changes when you start withdrawing:

• You're selling shares at depressed prices to fund your withdrawals
• Fewer shares remain to benefit from eventual recovery
• The damage compounds over the remaining years of retirement
• You can't "wait it out" because you need income to live

Research shows that the first 5-10 years of retirement are critical. This period is often called the "retirement red zone" or "sequence risk danger zone."

Why these years matter most:

• Your portfolio is at its maximum size—you have the most to lose
• You have 20-30 more years of withdrawals ahead
• Early losses have the longest time to compound negatively
• A crash now is far more damaging than a crash in year 20

While you can't control market returns, you can take steps to minimize sequence risk:

1. Build a Cash Reserve (2-3 Years)

Keep 2-3 years of living expenses in cash or short-term bonds. During a crash, draw from this reserve instead of selling stocks at depressed prices. This gives your portfolio time to recover.

2. Diversify Into Non-Correlated Assets

Assets like gold often rise when stocks fall. Having 10-20% of your portfolio in precious metals means you have assets to draw from (or rebalance) during stock market crashes.

3. Use Flexible Withdrawal Strategies

Instead of fixed 4% withdrawals, consider dynamic strategies that reduce spending during down markets. Cutting withdrawals by 10-20% during crashes can dramatically improve portfolio longevity.

4. Build a "Bond Tent"

Increase your bond allocation to 40-50% in the years immediately before and after retirement, then gradually reduce it. This reduces volatility during the danger zone.

5. Consider Partial Annuitization

Converting a portion of your portfolio to an annuity guarantees income regardless of market conditions. This reduces the amount you need to withdraw from volatile investments.

Gold is particularly valuable for managing sequence risk because of its behavior during crises:

When stocks crashed, gold held or gained value. A retiree with 15-20% in gold during these crashes could:

• Sell gold at high prices instead of stocks at low prices
• Rebalance by buying cheap stocks with gold proceeds
• Maintain withdrawals without depleting stock holdings

A Gold IRA lets you hold physical gold within your retirement account, making it easy to use gold as sequence risk insurance.

Frequently Asked Questions