Many investors understand market volatility, but few consider one of the biggest threats to their retirement income: sequence of returns risk. This risk can significantly impact those withdrawing income from their investments, especially if they rely on a concentrated portfolio or a single-ETF strategy.

What is Sequence of Returns Risk?

It’s not just the average return that matters—it’s the order in which those returns occur. If you experience negative returns early in retirement while making withdrawals, your portfolio may never recover, even if markets improve later.

Example: Two Investors, Same Average Return, Very Different Outcomes

• Investor A (Retired in 1990s Bull Market): Benefited from strong stock market growth, allowing the portfolio to grow even while making withdrawals.
• Investor B (Retired in 2000s Bear Market): Faced immediate losses, leading to a much shorter portfolio lifespan despite market recovery later.

Portfolio Simulation: The Real Impact of Timing

Using historical S&P 500 returns, we simulated the outcomes for both investors over a 10-year period. Each started with $1,000,000 and withdrew $50,000 annually.

Investor A, who retired in the 1990s bull market, saw their portfolio increase to approximately $4.83 million by year 10. The strong market performance early in retirement allowed their portfolio to continue growing despite withdrawals.

Investor B, who retired in the 2000s bear market, had a vastly different experience. Due to the dot-com crash and the financial crisis, their portfolio was hit hard by negative early returns. By year 10, their portfolio had shrunk to just $382,440, putting them at significant risk of running out of money in the following years. This highlights the devastating impact of retiring into a bear market, where early negative returns and ongoing withdrawals combine to erode capital quickly.

The Danger of a Single-ETF Portfolio

Many investors opt for an all-in-one ETF for simplicity—such as an S&P 500 tracker or a global equity ETF. While these offer diversification across stocks, they do not provide diversification across asset classes, which is critical in managing sequence risk.

Why a Single-ETF Portfolio is Risky in Retirement:

• High equity exposure: A 100% stock ETF can suffer severe drawdowns during downturns.
• No built-in risk management: Without bonds or alternative assets, downturns can lead to permanent capital loss.
• Withdrawal amplification: Selling assets in a falling market locks in losses, reducing the ability to recover.

The Importance of Diversification

A well-diversified portfolio spreads risk across different asset classes, reducing volatility and improving stability in retirement.

A balanced portfolio could include:

• Equities: Growth potential (e.g., global ETFs, dividend stocks)
• Bonds: Stability and income (e.g., government, corporate, inflation-linked)
• Property: Real estate provides rental income and inflation protection, reducing reliance on stock market performance
• Alternatives: Gold, private credit, or infrastructure investments for further risk mitigation
• Cash Buffer: Holding 1–3 years of cash for withdrawals reduces the need to sell assets in a downturn

Shifting Portfolio Alignment Over Time

The right allocation depends on your stage of life:

• Accumulation Phase (30s–50s): Heavier equity allocation for growth, minimal bonds or alternatives and regular contributions, reinvesting dividends
• Pre-Retirement (50s–60s): Gradual shift towards bonds, property, alternatives, and cash buffers, with reduced risk exposure to prepare for withdrawals and tactical rebalancing based on market conditions
• Retirement (60s+): Focus on capital preservation and income generation with higher allocation to bonds, dividend stocks, property, and liquid assets and a withdrawal strategy based on market performance (e.g., reducing withdrawals during downturns)

Strategic Withdrawal Strategies to Reduce Sequence Risk

One of the most effective ways to mitigate sequence of returns risk is through intelligent withdrawal strategies that adjust based on market conditions. Here are some approaches:

• Dynamic Withdrawals: Instead of withdrawing a fixed percentage, retirees reduce withdrawals in years when markets perform poorly and increase them when markets recover. This helps preserve capital during downturns.
• Guardrails Strategy: Setting upper and lower withdrawal limits—if the portfolio value drops below a certain threshold, withdrawals are reduced to preserve assets.
• Bucket Strategy: Segmenting a portfolio into different time horizons.
• Bond Ladders: Holding bonds that mature at different intervals provides predictable income and reduces reliance on selling equities in a downturn.
• Property Rental Income: Using rental income from real estate to supplement withdrawals can reduce reliance on investment portfolio liquidations.
• Flexible Spending Approach: In bad years, cutting discretionary spending and deferring large expenses can significantly improve portfolio longevity.

Final Thoughts

Relying on a single ETF or overly concentrated portfolio can expose retirees to unnecessary sequence of returns risk. Diversification, proper asset allocation, and a dynamic withdrawal strategy are essential to maintaining financial security in retirement.

Investing isn’t just about returns—it’s about managing risk at every stage of life. Ensuring your portfolio is aligned with your needs can mean the difference between running out of money or achieving lasting financial independence.

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