A market decline is unpleasant at any age. But a major decline immediately before or after retirement creates a special problem: you may be withdrawing money at the same time your investments are down.

That combination is called sequence-of-returns risk. It does not mean the market will stay down forever. It means the order in which gains and losses occur can matter much more once regular withdrawals begin.

Why the same average return can produce a different retirement outcome

During your working years, a falling market can be uncomfortable, but you may still be adding money to your accounts. You are generally not relying on those accounts for monthly spending.

In retirement, the direction of cash flow reverses. Instead of contributing, you begin taking withdrawals.

Imagine two retirees who experience the same long-term average return but in a different order. One gets several strong years first and the bad years later. The other gets the bad years first while making withdrawals. The second retiree may have to sell more shares at depressed prices to produce the same amount of spending.

That early depletion can leave fewer assets participating when markets eventually recover.

A simple example

Suppose a retiree begins with $800,000 and plans to withdraw $40,000 per year before considering taxes and inflation adjustments.

If the portfolio drops 20% early on, the account could fall to roughly $640,000 before the withdrawal. Taking another $40,000 reduces the amount left to recover. A later market rebound helps, but it is working from a smaller base.

This example is intentionally simple and is not a projection. The real outcome depends on investment mix, withdrawal timing, taxes, fees, inflation and future returns. The point is the mechanism: losses plus withdrawals can compound each other.

Sequence risk is not a reason to abandon growth

A common overreaction is to conclude that retirement money should not be invested in the market at all.

That can create a different risk. Retirement may last 25 or 30 years or longer, and inflation can steadily reduce purchasing power. Growth assets may remain important for long-term spending, healthcare, legacy goals and inflation protection.

The planning challenge is to avoid making the entire retirement paycheck dependent on selling volatile assets every month.

Build a spending buffer

One way to reduce withdrawal pressure is to maintain a pool of liquid assets for near-term spending. Depending on the household, this might include cash, money-market funds, short-duration fixed income or a structured withdrawal reserve.

A buffer can give investments more time to recover after a market decline instead of forcing immediate sales.

There is a tradeoff: assets kept in cash or very conservative holdings may earn less over long periods and can lose purchasing power to inflation. The reserve should therefore have a defined job rather than simply growing because volatility feels uncomfortable.

Create an income floor for essential expenses

Another approach is to identify expenses that should not depend on market performance and compare them with dependable income sources.

Social Security and pensions often form the base. If a gap remains, some retirees evaluate fixed annuities, income annuities or annuity income riders for part of that gap.

Those insurance guarantees are backed by the claims-paying ability of the issuing insurer and come with contract-specific liquidity, cost and surrender tradeoffs.

The objective is not necessarily to guarantee every dollar of retirement spending. It is to make sure a market decline does not automatically threaten the bills that matter most.

Flexible spending can also help

Retirement plans often assume spending rises smoothly every year. Real households can sometimes be more flexible.

If markets are weak, delaying a major vacation, vehicle purchase or other discretionary expense can reduce the amount that must be withdrawn from investments. When markets recover, spending can normalize.

This flexibility is much easier when essential expenses are already covered by dependable income.

Social Security timing affects the sequence-risk conversation

For some households, delaying Social Security can increase the eventual monthly benefit, subject to Social Security rules and the person’s circumstances. That can strengthen future guaranteed income but may require more portfolio withdrawals in the years before benefits begin.

That tradeoff should be modeled as part of the entire retirement-income plan rather than considered in isolation.

Do not manage sequence risk with one product

A resilient retirement plan may use several tools together:

Cash or near-term reserves
A diversified investment portfolio
Social Security and pensions
Planned withdrawal rules
Flexible discretionary spending
Fixed or guaranteed-income insurance strategies where appropriate

The right mix depends on how much income you need, how much liquidity you want, your time horizon and the role you expect investments to play.

The most useful stress-test question

Ask yourself:

If the market fell sharply during my first two years of retirement, what would I actually do?

Would you continue the same withdrawals? Use cash? Reduce discretionary spending? Delay a purchase? Draw from a different account? Would Social Security and pensions cover your essential bills?

If the answer is unclear, the retirement plan may need more structure before the retirement date arrives.

Plan the paycheck before the market tests you

The best time to think about sequence risk is before the first major retirement withdrawal—not after a bear market has already started.

King Life helps retirees organize assets by purpose and compare income strategies without assuming every dollar should be invested the same way. Explore Retirement Income Strategies, read how to think about an income floor, or request a no-cost retirement review.

This article is for general educational purposes and is not investment, tax or legal advice. Examples are simplified illustrations and are not forecasts of future performance.