Retirement income
Sequence of Returns Risk Retirement
October 2, 2026
By Jamie Hargrave, Cadence Capital Investments
Sequence of Returns Risk Retirement
Retirement income
Learn how sequence of returns risk retirement planning addresses return timing, portfolio withdrawals, and cash flow strategies to review with an advisor.
Sequence of returns risk retirement planning addresses is the effect of investment gains and losses arriving in different orders while a portfolio supports withdrawals. Early declines can have a larger effect when you are taking money out, even if the portfolio's average return over time is the same.
Average returns do not show what happens when spending continues through a downturn. If investments fall and withdrawals continue, selling holdings may leave fewer shares invested for a possible recovery. This article explains the mechanism and outlines the parts of a plan to review.
• Return order can affect a portfolio used for withdrawals even when average returns are the same.
• Selling during a decline can leave fewer shares invested for a possible recovery.
• Review income needs, planned withdrawals, investment mix, and cash flow together.
• Scenarios are planning tools, not predictions.
Sequence of returns risk is the effect of the timing of gains and losses on a portfolio used to provide income. Withdrawals change the balance available to experience future returns, which is why order matters once money is coming out.
An average summarizes performance over a period but does not show the path taken. Two journeys along the same road differ if one meets rough ground early and you need to stop along the way.
Withdrawals are those stops. If investments decline while you are drawing income, selling leaves fewer shares for a possible later recovery. Reversing the order of the same gains and losses can therefore produce a different result. Return order matters, but it does not determine a certain outcome: spending needs, investment mix, and the returns that actually occur all shape what remains.
A drawdown is a decline in value from a previous level. It describes a change, not what happens next.
A decline may prove temporary, but that is only knowable as events unfold. Shares sold during a decline to fund spending are not available to participate in any later recovery. Selling can also turn a change in market value into a realized loss on the units sold.
Each period, three things shape the balance: the return, the withdrawal, and the amount left invested. If values fall and a planned withdrawal still goes ahead, selling leaves fewer shares for a later gain to apply to.
A scheduled withdrawal does not automatically change when the portfolio declines. If cash is not available elsewhere, holdings may need to be sold. That reduces the balance invested, so a later gain applies to a smaller amount.
Abstract value units, not dollars, and not a forecast. A portfolio starts at 100, takes a 10-unit withdrawal after each period's return, with no costs or taxes. The same two returns occur in each path: a 20 percent gain and a 20 percent decline, in different order.
Decline first: 100 falls to 80. After a 10-unit withdrawal, 70 remains. A 20 percent gain raises it to 84. The next withdrawal leaves 74.
Gain first: 100 rises to 120. After a 10-unit withdrawal, 110 remains. A 20 percent decline brings it to 88. The next withdrawal leaves 78.
The simple average of the two returns is identical in each path, but the ending balances differ because withdrawals occur between returns. Without withdrawals, the same two returns in either order would leave 96. Actual results depend on withdrawals, allocation, costs, taxes, and market conditions.
Yes. Positive long-term averages do not make withdrawal timing irrelevant. While you are contributing, additions can offset declines. In retirement, withdrawals take money out while returns continue to change the balance.
An average smooths over the route taken. If withdrawals happen along that route, the timing of gains and declines affects how much remains invested. That is a planning variable, not a reason to make a rushed change after one period of market activity.
No. Diversification spreads investments across holdings or asset types and can reduce reliance on a single area, but it cannot remove market risk or promise a result. Different investments may decline at the same time.
For retirement planning, diversification shapes how a portfolio responds to conditions, while withdrawal amounts and timing affect how much stays invested. No allocation makes a return path predictable.
A pension election can be irreversible once submitted and effective. Social Security claiming choices have limits on whether and how they can be changed: an application may generally be withdrawn within twelve months of entitlement, once in a lifetime, and requires repaying benefits received.
Options and rules depend on the specific plan or program. For Social Security, consult the Social Security Administration. For an employer pension, review the plan documents. Confirm current details before acting.
Connect spending needs with the income sources and investments that support them. Rather than focusing on a single return assumption, map how money comes in and goes out, then consider how the plan responds under different conditions.
Income sources. Regular income expected from Social Security, a pension, or other payments.
Expenses. Essential costs and discretionary spending, noting which could be adjusted.
Planned withdrawals. Amounts expected from investment accounts and when income is needed.
Account types and investments. The accounts that may support withdrawals and the mix within them.
Liquidity needs. Cash available for near-term spending and how quickly other assets could be accessed.
A plan with spending flexibility presents different choices than one with little room to adjust. Other income sources affect how much must come from investments. None of these factors removes investment risk.
Scenario testing explores how a plan responds to different assumptions. It is not a prediction. A review might compare a path with weaker returns early against one with stronger returns early, holding withdrawals and the period constant.
For each scenario, note what stays the same and what changes. Clear assumptions show which factors influence the result. A projection is a tool for discussion, not a promise about future account values.
Bring the results back to practical questions: which expenses are flexible, what income exists apart from the portfolio, and how much cash flow is needed from which accounts.
Sequence risk links the income you draw from savings with the investments supporting those withdrawals. Reviewing both together clarifies the assumptions behind a plan. It cannot predict returns or prevent losses.
Income planning considers where income comes from and how withdrawals fit spending. Investment management considers how a portfolio is invested in light of those goals. Because withdrawals affect the balance left invested, changes in spending needs matter to investment discussions and vice versa.
Investment advisory services at Cadence Capital Investments are offered through Prosperity Financial, a Registered Investment Advisor, which acts in a fiduciary capacity for those advisory services. The firm is fee-based rather than fee-only: an affiliate may earn commissions on certain insurance and annuity products, disclosed before any recommendation.
The firm is based in San Ramon, serves individuals and families in the East Bay, and is not affiliated with Chevron or Chevron's employee benefit plans.
All investing involves risk of loss, including loss of principal. Past performance is not indicative of future results.
Yes. Withdrawals during a declining period can leave fewer assets invested for a possible recovery. A positive average does not show the path taken or how withdrawals affected the balance.
A withdrawal reduces the amount left invested. If values have also fallen, selling to fund spending may leave fewer shares to participate if values later rise. The effect depends on the portfolio, the size and timing of withdrawals, and market conditions.
No. It spreads exposure across holdings or asset types and may help manage concentration, but it does not remove market risk or prevent losses.
Not based on a general article. Consider any change in light of your goals, income needs, time horizon, and full financial picture. Pay particular attention to choices that may be difficult to reverse, such as a pension election.
Planned withdrawals, income sources, allocation, liquidity needs, and how the plan responds to hypothetical return paths. Ask which assumptions are being used and which decisions may be difficult to reverse.
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