Sequence of returns risk: why the order of your returns matters near retirement

The idea in one sentence

When you're saving, the order of your returns barely matters — you're not touching the money, so it all averages out. When you're withdrawing, the order suddenly matters a great deal, because you're selling assets to create income. A rough patch early in retirement can do damage the later good years never fully undo.

A clearly hypothetical illustration

Picture two retirees who each average the same return over 25 years and withdraw the same amount each year. One happens to hit strong markets early and weak markets late; the other gets the identical returns in reverse order. Same average, same withdrawals — yet the one who suffered the early downturn can run low on money years sooner, while the other finishes with plenty. The only difference was sequence.

These are simplified, hypothetical figures used to show the concept, not a projection of any real portfolio. But the effect is well documented and is exactly why the transition years deserve special attention.

Why it's called the "fragile decade"

The risk peaks in roughly the five years before and after you retire. Your balance is at its largest, and you've started — or are about to start — drawing income. A market drop during this window shrinks the base that has to last the rest of your life, and withdrawals turn a paper loss into a realized one.

Guardrails people use

• A cash or bond buffer — one to a few years of expenses set aside, so you can pause selling stocks during a downturn.
• Flexible withdrawals — trimming spending in bad years to reduce the damage.
• A protected income floor — covering essential expenses with sources that don't rise and fall with the market, so the necessities don't depend on timing.

Each of these has trade-offs — holding cash can drag returns; guaranteed income products carry costs and depend on the insurer's claims-paying ability. The goal isn't to eliminate risk but to make sure a bad first few years can't derail the whole plan.

Your next step

As you approach retirement, look at your income plan specifically through this lens: if the market fell sharply in your first few years, would your essential expenses still be covered without selling at the worst time?