Two retirees. Same savings. Same withdrawal rate. One runs out of money at 79. The other is still thriving at 95.
The difference between them had nothing to do with how much they spent, how disciplined they were, or how good their investments looked on paper. It came down to one thing most people approaching retirement have never heard of — and it's one of the most common risks I see pre-retirees walk into unprepared.
It's called sequence of returns risk. If you're within five years of retirement, understanding it now can be the difference between living the life you've spent decades building toward and draining a lifetime of savings a decade earlier than you planned.
What Is the "Retirement Red Zone"?
There's a critical window surrounding your retirement date — roughly the five years before and the five years after you stop working. I call it the Retirement Red Zone, and inside it, the math of the market works completely differently than it did during your saving years. (If you're still wrestling with the question of whether you've saved enough to even get here, start with When to Stop Saving for Retirement: The Exact Moment It's Safe.)
Think about what a market crash meant when you were still working. It was actually an opportunity. Your 401(k) kept buying every month, picking up shares at a discount. You had a paycheck coming in regardless of what the market was doing, and time was on your side.
Inside the Red Zone, that relationship flips. A downturn is no longer an opportunity, because now you're selling shares instead of buying them. Every month you draw income during a slump, you're forced to sell more than you should have to — and your portfolio is at its lifetime peak, so a crash early on wipes out more real money than the same crash would a decade later. You also have the least amount of time to recover. The decisions you make in this window have an outsized impact on whether your money lasts as long as you do.
A Tale of Two Retirees
Let me show you how dramatic this can be with a historical illustration.*
Meet Larry and Pete. Both retired with $1 million. Both planned to withdraw $50,000 a year — a 5% withdrawal rate — to supplement Social Security, increasing that amount with inflation each year to keep their purchasing power. Both were fully invested in stocks. The only difference between them was the year they retired.
Pete retired in 1966. It wasn't one big crash that hurt him — it was a prolonged stretch of stagnant markets paired with rising inflation that quietly destroyed his purchasing power year after year. The market barely moved early on, then came the steep decline of the early 1970s and the 1973–74 recession, when stocks fell nearly 48% while inflation ran high. Falling values and rising costs hit at exactly the same time. Every month Pete sold whatever shares he had to fund his income, and that income had to keep climbing with inflation even as his portfolio shrank. Based on historical modeling of that period, his $1 million would have been exhausted within about 18 years.
Larry retired in 1982 — same $1 million, same $50,000 withdrawal, same 5% rate — but just as one of the greatest bull markets in history was getting started. His portfolio grew even as he took money out. By year 10 he had more than he started with, and 30 years later he was sitting on just under $5 million.
Same starting balance. Same withdrawal rate. Pete ran out after 18 years. Larry was thriving at 30.
Why the Order of Returns Matters More Than the Average
What hurt Pete wasn't simply bad markets — it was the order in which they arrived. That's sequence of returns risk.
Most people assume that if their average return over time is solid, they'll be fine. But averages don't tell the whole story. The order of those returns changes everything.
Think of it like planting a tree. If a drought hits early, while the roots are shallow, the damage to its growth is severe. If that same drought hits twenty years in, when the roots run deep, the tree barely notices. A bad market early in retirement is that early drought. The shares you're forced to sell at the bottom are gone forever, and the portfolio that's left rebuilds from a permanently weaker base — even after the market recovers. In retirement, you don't have time to wait. That's the invisible damage: you can't see it coming, but it can quietly drain everything you worked for.
So if the sequence comes down to when you retire, what can you actually do about it? More than you might think — but it starts with having the right strategy in place before you retire. Here's the four-step defense.
A Four-Step Strategy to Defend Against Sequence Risk
Step 1: The Foundation — Restructure the Portfolio
A portfolio built for accumulation is not the same as a portfolio built for retirement. While you're working, leaning heavily into stocks makes sense — you have time to ride out the dips. The moment you start withdrawing, that changes. In retirement, you should have a portion of your assets in things that hold value when stocks fall: money market funds, short-duration bonds, treasuries. If Pete had held even 30% in stable assets in 1966, he'd have had something to draw from that hadn't lost half its value — buying his stocks time to recover instead of selling them at their worst.
Step 2: The Income Floor — Cover the Essentials
Your non-negotiable costs — housing, food, healthcare, utilities — should be covered by guaranteed income: Social Security, a pension, or a structured income strategy. If your essentials run $5,000 a month and Social Security covers $3,000, your portfolio only has to produce $2,000. Everything above that is discretionary. When your essentials are guaranteed regardless of the market, sequence risk becomes far more manageable.
Step 3: The Cash Buffer — Buy Time
Keep about three years of cash completely separate from your investment portfolio. When a downturn hits, you draw from the buffer instead of selling stocks while they're down, giving them time to recover. Think of it as insurance, not an investment — you don't expect your home insurance to earn a return; you have it so the worst doesn't cost you the house. Three years works because bear markets historically bottom within a year and recover over the next one to two. When markets finish a year higher, you top the buffer back up — always selling from a position of strength.
Step 4: The Guardrails — Adjust Automatically
Set spending rules before you retire so you're never making emotional decisions under pressure. With a 5% starting withdrawal rate, you might set an upper guardrail at 6% and a lower at 4%. If a downturn pushes your withdrawal above 6% of what's left, you trim spending by 10%. If growth pushes it below 4%, you give yourself a 10% raise — that's the trip, or a little more for the grandkids. The point isn't cutting forever; it's small, pre-decided adjustments that respond to conditions automatically.
The Real Question
Ask yourself this: if the market dropped 30% in your first year of retirement, would you already know exactly what you'd do?
If the answer is no, that's the conversation worth having. Most people spend 30 years doing everything right — but crossing the finish line without a plan to defend what you've built is one risk you can't afford to take. With all four of these steps working together, a bad sequence becomes painful but survivable. Without them, a lifetime of savings can run out before you even realize what's happening.
If you're close to retirement and would rather have someone look at your specific situation, schedule schedule a call with us at Allwealth Planning here: Clarity Call
We'll help you build a plan designed to last as long as you do.