Yesterday, we tackled the silent damage inflation does to fixed pensions. But even if you’ve got a well-balanced portfolio, there’s a hidden danger that could wreck your retirement if you don’t plan for it: sequence of returns risk.

This isn’t about losing money in the stock market over time. It’s about when you lose it—and how early losses can devastate your retirement, even if the market eventually recovers.

Let’s say two retirees both earn an average of 6% annually on their portfolios over 30 years. But one hits a market crash in year one, while the other enjoys a bull market early on. Who ends up richer?

Answer: the second retiree—by a long shot.

Here’s why: when you’re drawing down your savings in retirement, negative returns in the early years can force you to sell assets at a loss to cover your expenses. That shrinks your portfolio faster than gains can recover it. Once the base is smaller, all future growth is on a smaller pile of money.

In short: bad timing plus withdrawals equals disaster.

This is what’s called sequence of returns risk, and it’s one of the most destructive forces in retirement planning. The danger isn’t your average return—it’s the order of your returns during the withdrawal phase.

So how do you protect yourself?

One strategy is to create a buffer—cash or short-term fixed income you can draw from during down markets. That gives your stocks time to recover without selling them at a loss. Some experts recommend having 2–3 years of expenses in a cash-like vehicle to ride out storms.

Another solution is to lower your withdrawal rate, especially in volatile years. If you’re using the “4% rule” (taking out 4% of your portfolio each year), you may want to drop to 3% in bad years and adjust back up later. Flexibility helps preserve your base.

Also consider delaying big expenses. If the market drops, postpone that dream vacation or new car. Better to wait a year than permanently shrink your retirement fund.

A more advanced method is time segmentation, or “bucket strategies.” You divide your retirement assets into time-based buckets: short-term cash, mid-term bonds, and long-term growth. This helps you weather volatility by tapping stable assets first.

And don’t forget about annuities or pensions that offer steady, guaranteed income. These aren’t subject to market crashes and can help reduce pressure on your portfolio.

The elites? They’re shielded from this problem. With layers of passive income, family trusts, and business assets, they don’t worry about selling stocks in a crash. But for regular Americans, protecting against early losses is crucial.

Tomorrow, we’ll shift gears again and examine a hot-button topic: should you pay off your mortgage before retiring—or keep it and invest the cash instead?