How market timing can impact your retirement savings and what you can do about it
When planning for retirement, most investors focus on average returns. While that is important, there is another factor that can have an even greater impact on long term financial security. This factor is known as sequence of returns risk.
In simple terms, it is not just what the market returns. It is when those returns happen.
What Is Sequence of Returns Risk
Sequence of returns risk refers to the timing of market gains and losses, especially during retirement when you begin withdrawing income.
During your working years, market volatility is often less concerning because you are contributing regularly and have time to recover from downturns. However, once you retire and begin taking withdrawals, market timing becomes much more important.
When withdrawals happen during a market decline:
• Losses are locked in
• Your portfolio has less opportunity to recover
• Your retirement savings may not last as long
Why Sequence of Returns Risk Matters in Retirement
Market volatility during the early years of retirement, often called the fragile decade, can significantly impact how long your money lasts.
This happens because:
• You are withdrawing assets while markets may be down
• Your portfolio balance is reduced early
• Future growth occurs on a smaller base
Even if long term returns are strong, poor timing early in retirement can create lasting damage.
Real World Example of Sequence Risk
Consider this simplified example that demonstrates retirement income risk:
The only difference is the order of market returns.
Scenario One: Strong Market Early in Retirement
If positive returns occur early, the portfolio has an opportunity to grow before withdrawals take a larger toll.
Outcome: The portfolio may last approximately 36 years
Scenario Two: Market Losses Early in Retirement
If negative returns occur early, withdrawals compound the damage by reducing the base available for recovery.
Outcome: The portfolio may last approximately 23 years
The Takeaway
This creates a 13 year difference in retirement income, caused solely by timing, not performance.
This is the core of sequence of returns risk in retirement planning.
How Sequence of Returns Risk Can Impact You
Without proper planning, sequence risk can:
Strategies to Help Manage Sequence of Returns Risk
While no one can predict the market, a proactive strategy can help reduce risk and improve income stability.
At Jacobs Financial Services, we design retirement income strategies focused on both growth and protection.
Diversified Income Streams
Using multiple income sources can help reduce exposure to market volatility.
Strategic Withdrawal Planning
Adjusting when and how you take income can help preserve assets during down markets.
Protected Income Solutions
Incorporating tools such as annuities can provide:
• Guaranteed income streams
• Protection from market downturns
• Greater predictability for essential expenses
Build a More Resilient Retirement Plan
Sequence of returns risk is one of the most overlooked aspects of retirement planning, yet it can have a lasting impact on your financial future.
The goal is not to time the market. The goal is to build a retirement income plan that can withstand it.
With the right strategy in place, you can move forward with greater confidence, knowing your income is designed to support you through both strong and challenging market conditions.
Start Planning for a More Secure Retirement
If you are approaching retirement or already taking withdrawals, now is the time to evaluate your strategy.
At Jacobs Financial Services, we help clients create sustainable, tax efficient, and predictable retirement income plans.
Schedule a consultation today to better understand how sequence of returns risk could impact your retirement and what steps you can take to plan for it.