Imagine two retirees. Each starts with $1 million and withdraws $50,000 a year, indexed to inflation. Each earns the same average annual return over 25 years. The only difference is the order of returns: Retiree A gets the bad years early; Retiree B gets them late.
Retiree A runs out of money in year 18. Retiree B finishes with $1.3 million. Same average. Same withdrawals. Wildly different ending. That's sequence-of-returns risk.
Why it matters more in retirement than during accumulation
While you're saving, market crashes are a feature, not a bug — you're buying more shares cheaper. In retirement, every withdrawal you make during a bear market locks in losses. The shares you sell at $80 to fund a vacation can no longer participate in the recovery to $120.
Mathematically, the retirees who started in 1929, 1937, 1966, 1973, and 2000 have all faced material sequence risk. The retiree who started in 1932 enjoyed a great sequence and ran no real risk of depletion at any reasonable withdrawal rate.
What the risk actually looks like
A retiree who started a 60/40 portfolio at the end of 2007 and withdrew 4.5% inflation-indexed lived through the worst sequence of the last 50 years. By March 2009, the portfolio was down nearly 40%. Without a structural defense, that retiree would have permanently impaired their lifetime spending power — even though the market eventually recovered.
The structural defenses
Three approaches, used together, materially reduce the risk:
1. Bucket strategy
Hold 1–3 years of spending in cash and short-duration bonds. In a downturn, you spend from the bucket — never from the equity portfolio at depressed prices. The bucket gets refilled in normal years from the equity allocation.
2. Dynamic withdrawals
Rather than rigidly inflating last year's draw, adjust based on portfolio performance. Some years you take 4.5%; some years 3.5%; the average works out, but you stop selling shares cheap during crashes.
3. Glide-path equity allocation
Modern research (Pfau, Kitces) suggests the worst sequence-of-returns outcomes happen when retirees are most equity-heavy at the start of retirement. A bond-heavy portfolio at retirement that glides upward in equity allocation over time has shown better worst-case outcomes than a static 60/40.
Sequence-of-returns risk is the gap between the projection and the reality. You can't eliminate it. You can absorb it — if the portfolio is structured for the possibility before retirement begins.
At IronBridge, every retirement plan is built with a sequence-of-returns stress test as the primary lens. Schedule a conversation to see what your worst window looks like.