Sequence-of-returns risk is the technical name for a plain observation: the same market drop hurts more the closer it lands to retirement. A 30% drawdown at 57 and an identical drawdown at 67 do not produce comparable outcomes, even from the same starting balance. The gap comes down to what happens next, and whether the portfolio is being fed or drained during the recovery.
Consider two workers, each holding $500,000 in stocks, when a 30% decline takes both portfolios to $350,000. The 57-year-old still has roughly a decade of paychecks, contributions, and compounding ahead. Recovery gains apply to a growing base as new dollars come in.
The 67-year-old is doing the opposite. A 4% withdrawal on the pre-crash balance was $20,000; taking that same $20,000 from a $350,000 portfolio forces the sale of more shares at depressed prices. Those shares never participate in the rebound, and the loss becomes permanent rather than paper.
Why the Damage Roughly Doubles
Two forces compound in retirement that did not exist ten years earlier. Withdrawals during a drawdown convert unrealized losses into realized losses, since selling at 70 cents on the dollar removes the very shares that would have driven the recovery. And with wages no longer flowing in, every dollar of the rebound has to come from a shrunken market base.
Modeled over a full retirement, a bear market in the first few years of withdrawals can leave a portfolio worth roughly half of what an identical portfolio would be worth after the same decline a decade earlier.
The current backdrop sharpens the arithmetic. The University of Michigan Consumer Sentiment Index sits at 44.8, a level the survey classifies as recessionary. Headline PCE inflation reached 4.07% year-over-year in May 2026, with core PCE at 3.41%. The 2026 Social Security COLA came in at 2.8%. When benefits adjust more slowly than prices, the portfolio has to close the gap.
The Buffer That Blunts It
A pool of assets that does not have to be sold during an equity drawdown is the buffer. Short- and intermediate-duration Treasuries, investment-grade bonds, or cash equivalents are what it is usually built from. By holding two to three years of planned withdrawals in that pool, a retiree can fund distributions from it while stocks recover, leaving the equity allocation intact.
More productive than they were two years ago are the yields that have made the buffer. The 10-year Treasury yields 4.61%, and the federal funds upper bound is 3.75%. A positive spread of 0.45% is what the 10-year minus 2-year spread shows, rewarding those who take on modest duration risk. The VIX at 18.21 sits near its 12-month average, meaning the buffer is being constructed in a calm market rather than a panicked one
Sizing the Pool
The Bureau of Labor Statistics reports average annual household expenditures of $78,535 in 2024. Sized against that figure, two years of withdrawals run roughly $157,000, though retirees often build the buffer against expected retirement spending, which typically comes in below working-age expenditures.
Building it is harder in the current savings environment. The personal savings rate has fallen from 5.2% in the first quarter of 2025 to 3.9% in the first quarter of 2026, while personal consumption accounts for 92.3% of disposable income. A household that consumes almost everything it earns has limited runway to accumulate a bond ladder in the years leading up to retirement.
The mechanics narrow to a few decisions in the years around retirement. Shifting a portion of equities into bonds and cash before the first withdrawal date sets the buffer’s size. Refilling the buffer from equities in years when the market rises, and pausing that refill in years when it falls, keeps the pool available when needed. And matching the buffer’s duration to expected withdrawals, rather than reaching for yield further out on the curve, limits the risk that rate moves shrink the pool at the wrong moment. The math on a late-career drawdown is the same at any age. What differs is whether the portfolio has to sell into it.
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