You’ve been a disciplined investor for decades. You lived through the dot-com crash, the 2008 financial crisis, and the COVID drop. Each time, you stayed the course, didn’t panic, and came out ahead.
So why should the market volatility of 2026 feel any different?
Because you’re not 40 anymore.
The financial risk you’re facing now has a name: sequence of returns risk. It’s one of the most underestimated threats to a successful retirement — and many investors have never even heard of it.
What is Sequence of Returns Risk
I know, it sounds nerdy and complicated, but it makes sense when you break it down.
Sequence = the order in which things happen.
Returns = the amount by which our investments increase (or decrease) in value.
The main idea: mistakes later in your investment journey cost far more than the same mistakes made early on.
Let’s put some numbers to that.
Say you’re a young professional who just hit $100,000 in your portfolio. A recession hits and the market drops 20%. You’ve lost $20,000 on paper. Using the 4% rule as a rough measure of sustainable income, that drop cut your theoretical annual distribution from $4,000 to $3,200 — a loss of $800 per year. Painful on paper, but a young investor isn’t living off their portfolio yet.
Here’s the thing: that downturn might actually help them long-term. If they keep contributing and buying at depressed prices, they’re acquiring more shares for less. When the market recovers, the young investor is better off than before.
Now run the same scenario for a 57-year-old with $3 million invested.
A 20% loss is $600,000 — gone. Sustainable withdrawals drop from $120,000 per year to $96,000. The same percentage decline just cost this investor $24,000 in annual retirement income. And unlike the young accumulator, they don’t have decades of contributions and possible market gains ahead to help them recover. The retiree investor may want to make their portfolio less risky (see “diversify to keep” section below), and they probably have a shorter investment time frame overall given their stage of life and the fact that they are getting ready to switch from contributing to their portfolio to DRAWING INCOME from it. These two factors mean that, when the market recovers as history suggests is common, it can’t fully undo the damage done.
That’s sequence of returns risk. It’s not about how bad the drop is. It’s about when it happens relative to when you need the money.
A Tale of Two Retirements
Imagine two investors with similar circumstances.
- Both are 59 years old and plan to retire in three years
- Both have a $2.5 million starting portfolio
- Both will withdraw $150,000 annually in retirement for living expenses.
- Both experience the exact same market returns over 25 years — just in different order.
Investor A gets hit with two bad years (-20% and -10%) just before retirement. Then markets cooperate with smooth 7% gains per year for the next 23 years. Investor A’s portfolio is completely depleted by year 25. They will face some tough choices in retirement.
Investor B gets 7% per year for 23 straight years first, then takes the same -20% and -10% hits at the end. Investor B finishes with $3.1 million, more than they started with. They enjoy the retirement of their dreams.
Same returns. Same withdrawals. Same starting balance. The only difference is when the bad years arrived.
Investor A’s losses happened before retirement even started. They hit during the final accumulation years — when the portfolio was at its largest, when there was no time to recover before withdrawals began, and when the damage to the base permanently impaired everything that followed.
Investor B, meanwhile, enjoyed a long period of compound growth on a higher portfolio value before getting hit with big losses.
And here’s the part that should concern anyone within 5 years of retirement: this example only models normal living expenses. If Investor A faced other large, spending needs — unplanned medical bills, buying a new truck, etc. — that would place even more stress on their retirement income plan.
The Real Danger: Withdrawals Lock In Losses
This is the piece most people miss.
When you’re retired — or close to it — and the market drops, you still need income. That means selling investments at depressed prices that then can’t participate in a subsequent market recovery. Each withdrawal during a downturn digs a deeper hole that takes longer to climb out of, even when markets eventually rebound.
This is how a portfolio that looked perfectly on track can spiral into crisis within just a few years of retirement. Not because of bad planning. Not because of bad investments. Simply because of bad timing.
The Concentration Trap: “Concentrate to Build, Diversify to Keep”
There’s an old saying in wealth management: concentrate to build wealth, diversify to keep it.
You may have lived this without realizing it. Maybe you bought Tesla before it entered the S&P 500. Maybe the “Magnificent Seven” tech stocks carried your portfolio through the 2020s. Maybe you worked for the same company for 30 years and accumulated a meaningful position in their stock, which appreciated handsomely. However you got here, crossing the million-dollar threshold is a genuine accomplishment — enjoy it.
But don’t fool yourself. The strategy that led to growing your large nest egg is often different from the strategy that protects it for the rest of your life, and perhaps beyond.
The same concentration that drove those gains is just as likely to cut your portfolio in half as it is to double it from here. Investors with $1–$3 million approaching retirement need diversification more than they need the next hot stock tip. The goal has shifted from growth to protection, and the portfolio needs to shift with it.
We Rarely Feel the Earth Shifting Under Our Feet
What makes us vulnerable to sequence of returns risk? Human nature.
It’s been 20 years since I graduated college, but I still enjoy much of the same music now that I did back then. New college students gain the “Freshman 15” because they keep eating the same way while their metabolism quietly changes. We look in the mirror expecting to see the person we feel like on the inside, and we’re mildly surprised by what looks back at us.
We rarely feel the earth shifting under us as we move through life.
Investing is no different. The portfolio strategy that felt right at 45 — the one that worked at 45 — feels just as right at 59. The accounts look bigger than ever. Recent returns have been strong. Why change anything?
Because the rules of the game have quietly changed. And the cost of playing the old game with new stakes is enormous.
You may know this. You didn’t build a seven-figure portfolio by being naive. But there’s a meaningful difference between knowing something and actually executing on it — especially when it means changing habits that have served you well for decades. That gap between knowing and doing can destroy a retirement plan.
What You Can Do About It
Sequence of returns risk is manageable — but it requires action before the market drops, not after.
1. Build a retirement income buffer
Keep one or two years of living expenses outside your investment portfolio in cash equivalents such as money market funds or high interest savings accounts. When markets are down, draw from the buffer instead of selling equities at a loss. When markets recover, replenish it.
2. Adjust your withdrawal rate
The 4% rule is not etched in stone, it’s merely a guideline. A strong retirement income strategy for couples retiring today at 60–62 with a 30-year time horizon should adjust over time. Lowering withdrawals in the early years when sequence-of-returns vulnerability is high, or in periods of market stress (if you haven’t yet built a sufficient cash buffer) can help your nest egg last. Conversely, you may be able to withdraw more money during years of strong market returns.
A sustainable withdrawal rate also depends on the overall risk level of your investments. A savvy advisor can help you manage this tradeoff.
3. Honestly assess your concentration
If a meaningful portion of your portfolio is in one stock, one sector, or one type of investment — even one that’s been very good to you — that’s a conversation worth having before you retire, not during a market correction.
4. Write down your plan before the crisis hits
One of the most valuable things a financial plan does isn’t optimize returns — it’s give you a document to return to when markets are scary and emotions are loud. Knowing exactly what you own, why you own it, and what you’ll do in different market scenarios makes it far easier to stay rational when everything around you feels irrational.
5. Get a second set of eyes
The investors who successfully navigate the retirement transition aren’t necessarily the ones who picked the best stocks. They’re the ones who recognized when the rules changed — and adjusted accordingly.
Just like a personal trainer steers you toward exercises and nutrition appropriate for your current age, fitness level, and goals, an experienced financial advisor guides you through investment decisions based on where you are today, not where you used to be. A good advisor can help protect and shepherd your precious nest egg you spent your whole life building, through the crucial, high-stakes years leading up to retirement.
Matt Gagnon is a CFA charterholder and founder of Financial Empowerment, a fee-only registered investment advisor based in Plano, Texas. He works with married couples in their late 50s and early 60s navigating the transition from building wealth to protecting it. Schedule a free 30-minute call to talk through your situation — no obligation, no pressure.
Related reading:
- How to Choose a Financial Advisor (Without Getting Sold) — empowermenttools.net/how-to-choose-a-financial-advisor/
- Strategic Asset Allocation: How Professional Portfolios Are Designed — empowermenttools.net/professional-portfolio-design/
