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Wednesday, November 26
Sequence of Returns Risk
The Retirement Danger Most People Miss: Why Early Market Dips Hurt More Than Later Ones
Yesterday, while reviewing a reader’s retirement spreadsheet, I saw something that made my stomach drop. Everything looked perfect, steady investments, reasonable spending, and a solid withdrawal rate… until the projections showed one simple change:
A 10% market dip in Year 2 of retirement.
That one change cut her 30-year plan short by almost nine years.
This is the heart of what experts call Sequence of Returns Risk, and it’s one of the quietest, most misunderstood threats retirees face. Let me break it down in plain English, and show you how to build a simple “cash buffer” so you aren’t forced to sell stocks at the worst possible time.
🌟 Today’s Highlights
What sequence-of-returns risk really means
Why early retirement years matter most
Real examples from financial planners
How a “cash buffer” protects your long-term savings
Tools to run your own projections
📊 Stat of the Day
A 2022 Vanguard study found that two retirees with the same average return can end up with radically different outcomes depending on when market declines occur.
Source: Vanguard – Understanding Sequence of Returns
https://advisors.vanguard.com/insights/article/sequenceofreturns
💡 Retirement Insight: Why Early Dips Are So Dangerous
1️⃣ The Simple Explanation
If the market drops early in retirement and you're withdrawing money, you’re selling more shares while they're cheap. Even if the market recovers later, your portfolio doesn’t recover nearly as well, because you have fewer shares left to rebound.
Morningstar has an excellent overview here:
Morningstar – Sequence Risk Basics
https://www.morningstar.com/retirement/sequence-returns-risk
2️⃣ A Real Example from Fidelity
Imagine two retirees with $1 million:
Both average a 6% annual return over 25 years.
But one experiences negative returns in the first 5 years, while the other experiences them in the last 5.
According to Fidelity’s modeling:
The retiree with early downturns runs out years sooner
The retiree with late downturns stays fully funded
See the charts here:
Fidelity – Sequence of Returns Illustration
https://www.fidelity.com/viewpoints/retirement/sequence-of-returns
This is why the first five years after retiring are often called the “fragile decade.”
3️⃣ How a Cash Buffer Shields You
The most practical solution experts recommend is simple:
A “2–3 year cash buffer.”
Cash, high-yield savings, short-term Treasuries, anything stable.
The goal:
So you don’t sell stocks during a downturn.
This guide explains the approach:
Schwab – Building Your Retirement Cash Reserve
https://www.schwab.com/learn/story/how-to-set-up-your-retirement-paycheck
4️⃣ What I’m Doing This Week
I personally reviewed my own allocation and set aside 24 months of expenses in cash-equivalent accounts. It’s boring. It’s conservative. But it’s one of the strongest shields against early-retirement downturns.
If you want a free tool to experiment with withdrawal scenarios, this one is excellent:
Portfolio Visualizer - Withdrawal Simulator
https://www.portfoliovisualizer.com/withdrawal-simulator
Try modeling a downturn in Year 3, it's eye-opening.
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🔑 What You Can Do This Week
Estimate your first 3 years of retirement spending
Build (or start building) a 2-3 year cash buffer
Use a simulator to test downturn scenarios
Review your stock/bond ratio for early-retirement safety
Make sure you’re not relying on “average returns” alone
📬 Question for You
Have you ever modeled your retirement plan with a market drop in Year 1–5?
Your experience could help someone else see the risk clearly.
Just reply, I love hearing your stories.
Warmly,
Sarah