What Is Sequence of Returns Risk? Retiring Into a Crash

By Ira Koyner, author of Financial Fortress · Last reviewed November 2026

Sequence of returns risk is the danger that a market drop arrives just before or just after you retire, while you are starting to withdraw. Two retirees can earn the same average return and end up with very different results, because losses taken early, while money is coming out, are never fully recovered.

Sequence risk does not care about averages. It cares about timing.

Why does a loss hurt more once I start withdrawing?

Because the math of recovery is unforgiving. A 40% drop takes $100 to $60. A 40% gain from there only gets you to $84. Getting back to $100 takes a 67% gain.

Now add withdrawals. Every dollar you take out while the account is down is a dollar that is not there when the market recovers. The same loss ten years into retirement does far less damage, because the account has had time to grow and fewer withdrawals have been taken from a low base.

What happens to my 401(k) if the market crashes right before I retire?

The risk starts before your last day of work. A 20% drop a year or two before retirement can force a hard choice: retire later, go back to work, or live on less than you planned. That is an emotional hit as well as a financial one.

An illustration from Financial Fortress: Blackjack Dicky. Dicky retired on December 29, 2006 with $100 and took $5 a year. Within two years the 2008 crisis cut the market nearly in half. By the end of 2008 his $95 had become $52.45.

He stayed invested and kept withdrawing. Ten years after he retired, the market had more than recovered, but his account stood at $72.27. Same market, bad timing.

Had he retired at the end of 2008 instead, at the bottom, his withdrawals would have come out as the market rose. Same investor, same market, very different result. That is sequence risk.

Hypothetical illustration from the book, not a client. Returns are based on SPY closing prices (price return only, dividends excluded) and do not reflect fees, taxes or transaction costs. Results will differ for individual investors and are not a guarantee of any outcome.

Should I move my 401(k) to cash when the market drops?

For most people, selling after a big drop locks in the loss and misses the recovery. The largest gains often come right after the ugliest declines, and they rarely feel obvious while they are happening.

Prudence retired the same year as Dicky, with the same portfolio and the same withdrawals. In early 2009, with her balance down sharply, she moved to cash and planned to get back in once things settled. The market bottomed that March and began one of the strongest recoveries in modern history. By the time she felt safe again, it had been running for over a year. She ended the decade worse off than Dicky.

Dicky’s problem was timing. Prudence’s problem was a plan built for someone with more tolerance for losses than she had.

Discipline alone is not a plan. If you know you could not sit through a 38% drop, the plan should be built for who you are, not who a model assumes you are.

How can a retirement plan handle sequence risk?

Nobody can choose the market they retire into. A plan can still be built so a bad early sequence does less damage:

Keep near-term spending out of the market. Cash or short-term reserves for the first years of withdrawals mean you are not forced to sell while prices are down.
Use guaranteed income for essential bills. Social Security, a pension or an annuity that covers the basics takes pressure off the portfolio.
Shape how much loss can reach you. Some tools, such as buffered annuities and structured notes, absorb part of a decline in exchange for a cap on gains. They have costs and limits and do not suit everyone.
Decide the rules before the drop, not during it. Plans break when decisions shift from rules to reactions.

In the book, Prudence’s decade is replayed in a buffered strategy that absorbs the first 15% of any yearly loss and caps gains at 14%. Her 2008 loss is about 23% instead of 38%: still a loss, but one she could sit through. The trade-off is real. Starting from the 2008 bottom instead, the cap would have cost her a large part of the recovery.

Hypothetical illustration, not a client. Buffered strategies limit gains, carry fees and credit risk of the issuer, and do not protect against losses beyond the buffer.

When is sequence risk highest?

In roughly the five years before and the five years after you retire. The account is at its largest, withdrawals are starting, and there is the least time to recover. A loss in your forties is a setback. The same loss at 64 can change when you retire and how much you can spend for the rest of your life.

What else can reduce sequence risk?

Spend flexibly. Taking less in a bad year, mainly from discretionary spending, leaves more invested for the recovery.
Delay Social Security. A larger guaranteed check later means less has to come from the portfolio in every year after.
Work a little longer, or part time. One or two more years of earnings can mean withdrawals start after the bad years rather than during them.

Frequently asked questions

Does sequence of returns risk matter before retirement?

Much less. While you are saving and not withdrawing, the order of returns does not change the ending balance. It matters most once withdrawals begin, and in the few years just before.

What is a bucket strategy?

Keeping the next few years of spending in cash or short-term bonds and the rest invested for growth, so a market drop does not force you to sell investments while they are down.

Can an annuity reduce sequence risk?

Lifetime income from an annuity, like Social Security or a pension, covers bills without selling investments. It reduces the risk at the cost of access to the money and, for some contracts, fees.

Questions to ask your advisor

If markets fell 30% tomorrow, what would this plan expect me to do, and what is built into it to stop me making a bad decision?
If a 20% to 30% drop happens within two years of my retirement, what changes first: my retirement date, my spending or my portfolio?
Which of my holdings are expected to hold value in a rate shock like 2022, and which in a crash like 2008?