Your First Five Years of Retirement Decide the Next 25: The Truth About Sequence Risk

Same inputs, opposite endings

The most underrated risk in retirement isn't your average return — it's the order your returns show up in.

Here's the case that stops people cold every time I bring it up. Two retirees, both 65, both starting with $500,000 in the exact same portfolio: 60% S&P 500, 40% intermediate-term Treasury bonds. Both pull $25,000 the first year and adjust for inflation every year after. Same 5% starting withdrawal rate.

Thirty years later, one of them has over $2 million still in the bank. The other ran out of money before turning 80. Same picks, same fees, same withdrawal amounts. They even earned the same 30-year average return.

So what split them apart? It's called sequence of returns risk.

The 1966 retiree vs. the 1982 retiree

What matters is what the market did in the years right after you retired.

The first retiree retired in 1966 and got a brutal opening. The S&P 500 stagnated. Inflation ran over 5% a year for the next decade and a half. Stocks returned less than 1% a year nominal during that stretch, and after inflation, real returns were negative for the first 15 years.

This person had to sell stocks every year to fund withdrawals — at depressed prices. Each $25,000 withdrawal ate a bigger and bigger slice of the portfolio. By year 10, the account was down to roughly $260,000. The market finally turned in 1982, but here's the trap: there wasn't enough capital left to ride the recovery. By year 20 the portfolio was bleeding cash, and by year 25 it was running on fumes.

The second retiree retired in 1982. Same $500,000, same 5% withdrawal, same 60/40 mix. But this person caught the start of one of the greatest bull markets in US history. The S&P 500 returned over 15% a year for the first decade. The portfolio actually grew while $25,000 a year was being pulled out. By year 10 it was over $1 million, by year 20 pushing $2 million, and by year 30 it ended somewhere between $2 and $3 million.

Same average return, same holdings, same withdrawals. The only difference was the sequence.

The average-return illusion

Most retirement calculators assume you earn 8% or 10% smoothly compounded every single year. Reality doesn't work like that.

Reality is lumpy. There are bull markets, bear markets, and lost decades. Two retirements with the same 30-year average can end completely differently depending on whether the losses cluster early or late. In the withdrawal phase, selling stocks into a downturn to raise cash permanently erodes your principal. I think of it as compounding in reverse.

That's why "I'll just work a little longer if the market drops" isn't the safety net people think it is. Nobody knows how long a downturn lasts. A stagflation stretch — high inflation, weak growth — can drag on for years, and if those years overlap with your first five in retirement, the damage doesn't heal.

How thin the margin really is

Wade Pfau, a retirement researcher I cite constantly, ran a number that drives this home.

If the 1966 retiree had simply skipped withdrawals in the four worst years following downturns, that retiree would have ended with around $4 million instead of zero. Four skipped years — and the outcome swings from broke to a multimillion-dollar estate.

That's how thin the margin is. But it's also the hopeful part: a little structure can flip the entire result.

So how do you protect against it

My takeaway is simple. You can't control the sequence of returns, but you can absolutely control whether your portfolio is built to survive a bad one.

The whole game is making sure you never have to force-sell stocks in a down market. I organize that into three moves — the glide path (a gradual shift in allocation), the income floor (a cash buffer), and bucket sequencing (the order you withdraw from). Put those three together and even if the market drops 20% five months after you retire, your first few years are covered.

I'll break down each move in detail in the next piece. For now, the one thing to walk away with is this: don't leave it to luck. Retirement isn't a game of averages — it's a game of order.