Let’s say you have two retirees with the same $1 million portfolio and they each withdraw the same amount each year, and both also earn the same average return over the next 30 years. The thing is, one of them is going to run out of money by 25, while the other finishes with more than $3 billon, and the difference here has nothing to do with stock picking, fund selection, or fees. Instead, everything comes down entirely to when bad years happen.
This concept is known as the “sequence of returns” risk, and it’s one of the most important and least understood threats to retirement income. The idea is pretty straightforward: a market downtown in the first few years of retirement, combined with regular withdrawals, can permanently damage a portfolio’s ability to sustain income over time. The same downturn occurring 10 or 15 years later, when withdrawals have already been funded by earlier growth, does far less harm.
Morningstar’s 2026 State of Retirement Income research found that retirees who encountered poor returns in the first five years and didn’t adjust their spending were far more likely to exhaust their savings than those who came through the early years with positive returns. In fact, roughly 70% of simulated portfolio failures were linked to losses taken in the first five years. This makes the opening stretch of retirement the single most consequential period of your financial future.
Why Early Losses Hit Harder Than Late Ones
During the accumulation phase, a market decline is an opportunity, and as prices drop, you keep contributing, and you buy more shares at lower prices. The math works in your favor, but the moment you start withdrawing, the dynamic reverses completely. When you sell into a declining market, you lock in losses and reduce the number of shares available to participate in any recovery. A 20% decline in year one of retirement, combined with a $50,000 withdrawal, doesn’t just cost you the decline itself. This decline can also cost you every dollar those sold shares would have compounded over the next 20 to 25 years. This is why a 10% drop at age 30 and a 10% drop at age 63 are not even remotely close to the same event.
The Math That Makes It Irreversible
Schwab’s Center for Financial Research has modeled what happens to two identical $1 million portfolios when one takes a 15% hit in the first two years, and another takes the same hit a decade later. Assume that both withdrew $50,000 initially and adjusted 2% for inflation, and earned 6% in all other years. The early-loss portfolio was fully depleted by year 18, while the late-loss portfolio lasted the full 30 years.
This is the part of the argument that catches most people off guard, as the average return over the full period was identical in both cases, and the total return was also identical. The thing that changed was timing, and it’s the only variable that can make all the difference between financial security and running out of money.
Morningstar’s 2026 research puts the current safe withdrawal rate for a 30-year retirement at 39%, but even this number assumes that early years don’t deliver a significant downturn.
Why the 4% Rule Doesn’t Account for This Scenario
During the accumulation phase, a market decline is an opportunity, and as prices drop, you can keep contributing, and you buy more shares at lower prices. Ultimately, the math works out in your favor, but the moment you start withdrawing, this dynamic reverses completely.
When you sell into a declining market, you lock in losses and reduce the number of shares available to participate in any recovery. Hypothetically, a 10% decline in year one of retirement, combined with a $50,000 withdrawal, doesn’t just cost you the decline itself. Instead, it costs you every dollar those sold shares would have compounded over the next 20 to 25 years, and this is why the same 10% or 15% drop at age 35 isn’t the same as a similar drop at age 63.
How Retirees Can Protect the Early Years
The most effective defense here is usually the most basic, in that you just shouldn’t sell during a downtown. Schwab recommends holding at least one year of anticipated withdrawals in cash, with another two to four years in short-term bonds or Treasuries. The logic here is that the average bear market recovery time from peak to peak has historically been about three and a half years, so a four-year cushion should (emphasis on “should”) cover most scenarios without forcing you to liquidate equities at the worst possible time.
Beyond the cash buffer, flexibility matters more than most retirees realize, as Morningstar’s research indicates that every flexible spending strategy it tested supported a higher initial withdrawal rate than the fixed-withdrawal approach. Even small adjustments, like skipping an inflation increase in a down year or trimming discretionary spending by 10%, can meaningfully extend portfolio longevity. The retirees who survive the first five years aren’t necessarily the ones with the biggest portfolios, they are just the people who are most willing to adapt.
Why This Matters More in 2026
Heading into 2026, retirees are facing an environment where this risk definitely deserves extra attention. After strong equity returns in late 2025, portfolio balances are elevated, which means the potential dollar impact of a correction is larger than it would have been two years ago. At the same time, inflation has moderated but hasn’t disappeared, all while healthcare costs are rising faster than general prices, and bond yields, while improved, are trending lower as rate cuts continue.
None of this means that a downturn is guaranteed to arrive soon, just that the conditions are set for a sequence risk to do the most damage if one does arrive. For anyone retiring this year or in the next few years, the priority isn’t predicting what the market will do. It’s about building a portfolio that doesn’t require the market to cooperate in order to pay your bills. Cash reserves, flexible spending rules, and a diversified income strategy aren’t just nice to have, but in the first five years of not working, they’re the difference between a retirement that works and one that does not.
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