Why a bad first year matters more than a bad tenth year
Two people can retire with the same savings, earn the same average return, and end up in very different places. The difference is the order the good and bad years arrive in.
Following Seas Retirement · Reviewed October 5, 2026 · General education, not personal advice
Once you start taking income, a downturn early in retirement does more lasting damage than the same downturn later. It's called sequence of returns risk, and many plans are built on averages that never test for it.
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Same average, different outcome
Picture two retirees. Each starts with the same savings and takes out the same amount each year. Over 25 years, their accounts earn the same average return.
The only difference is the order. One gets the poor years first and the strong years later. The other gets the strong years first.
The first retiree can run short years before the second, even though the averages match. The reason is simple. Taking income during a downturn means selling more shares at low prices to raise the same number of dollars. Those shares are gone when the market recovers, so the recovery has less to work with.
Why it only shows up once income starts
While you're still working and adding money, the order of returns matters much less. A downturn can even help, because your contributions buy at lower prices.
The picture changes the day money starts coming out instead of going in. That's why a plan that worked for thirty years of saving can need a second look as retirement gets close.
The years that matter most
The risk is highest in the few years just before income begins and the first several years after. Savings are usually at their largest then, so a drop is measured against the biggest number you've ever had, and there are the most years of withdrawals still ahead.
A poor stretch twenty years into retirement still hurts, but there are fewer years left for it to affect.
How people plan for it
There's no single fix, and each approach comes with a tradeoff. These are the common ones:
- A cash reserve. Holding a year or more of income outside the market, so withdrawals can pause during a downturn. The tradeoff is that cash earns less over time.
- Flexible withdrawals. Taking a little less in poor years. The tradeoff is a less predictable paycheck.
- Changing the mix as retirement nears. Holding less in stocks during the most fragile years. The tradeoff is less growth if markets do well.
- Income that doesn't depend on the market. Social Security, a pension, or an annuity covering the essentials, so savings don't have to be sold at a bad time. The tradeoffs depend on the source, and can include less access to the money.
Questions to ask about your own plan
You don't need to predict the market to test for this. Three questions go a long way:
- If the market fell sharply the year I retire, where would next year's income come from?
- How much of my essential spending is covered by income that doesn't move with the market?
- Has my plan been tested against a poor first five years, or only against an average?
Common questions
What is sequence of returns risk?
It's the risk that poor market returns arrive early in retirement, while you're taking withdrawals. Early losses combined with withdrawals can shorten how long savings last, even if long-term average returns turn out fine.
Does sequence of returns risk matter while I'm still saving?
Much less. While you're adding money, a downturn lets your contributions buy at lower prices. The risk becomes important once you start taking money out.
When is sequence of returns risk highest?
In the few years just before retirement income begins and the first several years after, when savings are usually at their largest and the most years of withdrawals are still ahead.
Can sequence of returns risk be removed completely?
No approach removes every risk. People manage it with cash reserves, flexible withdrawals, a more conservative mix near retirement, or income sources that don't depend on the market. Each has tradeoffs.
Want this looked at for your own plan?
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How much of your retirement is riding on the market? →When should you claim Social Security? →What are you paying on your retirement accounts? →This guide is general education. It isn't investment, tax or legal advice, or a recommendation of any product. Rules and figures can change, so confirm current details with the IRS, the Social Security Administration, or a qualified professional before acting.