How Withdrawals During Down Markets Can Derail Your Retirement Plan

How Withdrawals During Down Markets Can Derail Your Retirement Plan

When people think about risk in retirement, they tend to focus on market volatility or inflation. But one of the most overlooked, and most damaging, risks retirees face is when they take withdrawals.

It’s called sequence of returns risk, and it can quietly undo even the best investment strategy if not properly planned for. Two investors could have the exact same average return, yet one runs out of money years earlier simply because of the timing of those returns.

The sequence problem explained

Here’s a simple way to think about it: imagine two retirees, both starting with $1 million and withdrawing $50,000 per year. Both average a 9% annual return over 25 years—but one experiences negative returns early on, while the other enjoys positive returns in the first few years.

Even though the long-term average return is identical, the first retiree may run out of money nearly a decade earlier. Why? Because those early withdrawals during down markets lock in losses. With fewer shares left to recover when markets rebound, the portfolio never fully regains its footing.

That’s the essence of sequence risk, it’s not just about how much you earn, but when you earn it.

Why it matters so much in retirement

During your working years, volatility often feels temporary. You’re contributing to accounts, buying more shares when prices are lower, and benefiting from dollar-cost averaging.

In retirement, however, the dynamic flips. You’re taking money out instead of putting it in. When markets drop and withdrawals continue, you may be forced to sell investments at lower prices to fund your income needs. That leaves fewer assets in the market to participate in the eventual recovery.

Over time, that can lead portfolio depletion: a gradual erosion of principal that becomes difficult to reverse.

Real-world perspective

History has shown how sequence risk can play out in real life. For instance, Vanguard’s research found that retirees who started drawing income during or just before major downturns faced significantly higher risk of portfolio depletion despite similar long-term return environments. 

Another study by Jackson illustrates this clearly: two hypothetical investors, both retiring with $500,000 and taking 5% withdrawals (inflation-adjusted). The one who began in 2000 ran out of money, while the one who began in 2003 did not despite identical starting portfolios and rules

How retirees can prepare for down-market years

While there’s no way to eliminate sequence-of-returns risk entirely, there are several approaches investors often consider to help reduce its impact.

Know your income shortfall.
Understanding how much you’ll need to withdraw from investments each year, beyond Social Security or pension income, is a critical first step. A clear picture of your shortfall helps determine how much stability and liquidity you may need in your plan.

Maintain income sources that aren’t tied to daily market swings.
During market downturns, retirees who have steady sources of income, such as bond interest, dividends, or structured fixed-income vehicles, can often avoid selling equities at depressed prices. Dividends in particular can act as a buffer during volatile periods, providing ongoing cash flow even when share prices fluctuate.

Consider tools that offer downside protection.
Some investors use certain types of annuities that include caps and floors to help limit downside exposure while participating in part of the market’s upside. These vehicles aren’t right for everyone and come with costs and trade-offs, but they can serve as a hedge when markets are unpredictable.

Build in diversification
Holding a mix of investments with different levels of beta (or sensitivity to market movement) can help smooth returns over time. Assets that respond differently to economic conditions can reduce the impact of sharp declines in any single area.

The bigger picture

Retirement success isn’t just about chasing returns, it’s about managing the order of them. A plan that looks solid on paper can fall short if withdrawals collide with market downturns early on.

That’s why it’s critical to view your retirement strategy as more than just an investment portfolio. Cash flow management, income stability, and diversification all work together to determine how long your assets last.

Sequence-of-returns risk can’t be predicted, but it can be prepared for. With the right structure in place, retirees can navigate volatility with confidence instead of fear.

Plan for the sequence, not just the return

At Strategic Wealth Partners, we help clients build retirement income strategies designed to weather both bull and bear markets. Our team of CFP®, CFA®, and CPA professionals collaborates to create plans that balance opportunity with protection so clients can stay on track no matter what markets are doing.

If you’d like to understand how your portfolio would hold up under different market scenarios, schedule a conversation with our team today.