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Sequence-of-Returns Risk: What to Know

Comparison Adviser

Why the order of your investment returns in early retirement can make or break your savings, and how a bucket strategy helps.

By Sean Canonica · May 3, 2025 · Featuring Ron Tallou

Summary

Ron Tallou warns that one of the most common retirement mistakes is withdrawing money without assessing how each holding has recently performed, and explains how a three-bucket strategy can protect income during a downturn.

Picture this: after years of hard work and diligent saving, you're finally ready to retire. But just as you begin withdrawing income from your portfolio, the market takes a sudden downturn. This unfortunate timing, known as sequence-of-returns risk, can have a significant impact on your financial future.

How sequence-of-returns risk works

Once you retire, it’s time to start drawing income from your accounts, such as a 401(k) or Roth IRA. Sequence-of-returns risk occurs when you begin making withdrawals during a market downturn, forcing you to sell investments at a loss and potentially shrinking your savings faster than you expected.

To imagine the impact, consider two retirees, A and B, who each retire with $2 million and plan to draw down $80,000 annually. Although they experience the same average annual return over a 30-year retirement, the sequence of those returns differs. Because Retiree B faces a downturn in the first few years and must sell investments at lower prices to fund withdrawals, their portfolio depletes more quickly overall.

When to start planning for it

Because sequence-of-returns risk is a serious threat to your retirement savings, it's important to begin planning for it as soon as possible. When you're younger and have a longer time horizon, it makes sense for your portfolio to comprise long-term growth assets such as equities. However, as you near your post-working days, this becomes risky.

Using a bucket strategy to protect your retirement income

One of the most common ways to guard against market downturns is the bucket strategy. It divides your retirement savings into three time-based categories: a short-term bucket that holds cash and near-liquid investments, a medium bucket that prioritizes modest growth via bonds or CDs, and a long-term bucket that allows you to invest in growth equities.

Mistakes to avoid

Ron Tallou, founder and owner of Tallou Financial Services, notes a common mistake he sees when clients are wanting to take money out of their accounts without assessing the recent performance of funds.

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"They should be mindful of efficiently withdrawing money. This means looking at what the different holdings and accounts have done," Tallou says. If an asset experiences a drop in value, it’s often best to avoid selling it until it rebounds.

How a financial advisor can help

Planning for sequence-of-returns risk requires careful portfolio oversight and attention to market behavior. A professional can help you determine what your income needs will be in retirement, and use that to inform how much to keep in each bucket. Beyond the numbers, a high-quality advisor should keep you grounded and calm as you enter retirement.

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retirement-planningsequence of returns riskretirement incomebucket strategywithdrawalsmarket volatility