Summary
Most investors think about sequence of returns risk only in retirement — the danger that poor market returns early in retirement combined with withdrawals can permanently damage a portfolio.
But this risk also applies in the 10 years leading up to retirement, when savings are at their peak and portfolio volatility can dramatically affect both the size of retirement savings and the actual retirement date.
- Poor returns near retirement can delay your retirement date by years.
- In the final decade, market volatility has a much bigger impact than new contributions.
- A decreasing equity glidepath (gradual shift to more conservative investments) can help reduce retirement date risk.
What Is Sequence of Returns Risk?
Sequence of returns risk is the impact that the order of investment returns have on your retirement portfolio.
For retirees, poor returns in the early years of withdrawals can permanently reduce income.
For accumulators, poor returns late in the savings phase can delay reaching the retirement goal.
Example:
Imagine an investor saving $300/month starting at age 25 with the goal of reaching $1,000,000 by age 65. If the portfolio earns a steady 8% return every year, the goal is met. But in reality, returns vary:
- If good years come early, the portfolio may hit the target by age 62.
- If bad years come late, the investor may still be short at age 65 and may need to work until age 70.
Why the Final Decade Matters Most
In the early years of saving, contributions matter more than investment returns. By the last decade, the reverse is true.
- At age 30, a $3,600 contribution is more impactful than portfolio growth.
- By age 60, portfolio growth can exceed $75,000 in a single year — far more than annual contributions.
This means that market volatility in your 50s and 60s can outweigh decades of disciplined saving.
A Real-Life Example of Retirement Date Risk
Consider Mark and Susan, both age 55, each with about $750,000 saved and a plan to retire at 65 with $1 million.
Mark’s story: His portfolio experienced strong returns from ages 55–60, then a bear market hit just after he retired. Since most of his growth came before retirement, he reached his $1 million goal by age 63 and could retire on schedule.
Susan’s story: Her portfolio had the opposite sequence: a bear market hit at age 60, wiping out 20% of her $750,000 portfolio just as it became most vulnerable. Even though her portfolio recovered in later years, she had to work until 70 to finally reach her $1 million goal.
Both had the same average returns over time, but the sequence of those returns made the difference between retiring at 63 and retiring at 70.
This illustrates why the decade before retirement is so critical — when the portfolio is largest, volatility can shift your retirement timeline by years.
Retirement Date Risk
Retirement planning has two goals:
- Accumulate a target dollar amount.
- Reach that amount by a target date.
If either target is missed, the retirement plan must adjust.
- If you can keep working, you may simply work longer to recover.
- If you’re forced to retire early (due to health, layoffs, or family needs), your portfolio may be locked in at the wrong time.
This is called retirement date risk — the chance that market volatility shifts your retirement timing by years.
How to Manage Risk Before Retirement
1. Reduce Portfolio Volatility
- The most direct way to lower risk is by gradually reducing equity exposure in the final decade. This strategy is known as a decreasing equity glidepath.
- Start shifting from stocks to bonds or lower-volatility assets.
- Aim to protect what you’ve built rather than maximize growth at the finish line.
2. Increase Savings in the Final Years
- If you reduce equity exposure, you may give up some growth potential. One way to offset this is by increasing contributions.
- Example: Raising savings from $300/month to $420/month can keep the retirement target on track even with more conservative returns.
3. Stress-Test Your Plan
- Run scenarios for both positive and negative return sequences.
- What if markets fall 20% in the last two years before retirement?
- What if returns average 0–2% instead of 8%?
Knowing these answers helps you set realistic expectations.
Takeaways
- Sequence of returns risk matters before retirement, not just after.
- The decade before retirement is when portfolios are most sensitive to volatility.
- A severe bear market right before retirement could push your retirement date back years.
Managing risk with a decreasing equity glidepath and possibly higher savings can help preserve your target retirement date.
Final Thoughts
The final decade before retirement is often called the “retirement red zone” — the period when strategic decisions and market outcomes have the biggest impact.
If you’re within 10 years of retirement, now is the time to:
- Review your asset allocation.
- Consider a more conservative glidepath.
- Stress-test your plan against different market conditions.
Your retirement date doesn’t have to be left to chance. Careful planning today can help ensure you step into retirement on your own terms.
If you’re looking for faith-based retirement planning in Woodstock, GA, our Strategic Stewardship team can help you prepare confidently.
(Image credit: Slava-Jamm ZhhpNDZpYio-Unsplash)