Most people think retirement risk comes from poor long-term returns.

In reality, the most dangerous years of retirement are often the first five.

Why? Because it’s not just how much your portfolio earns that matters — it’s when those returns happen. A sharp market drop early in retirement can permanently weaken your income plan, even if markets recover later.

This hidden threat is called sequence-of-returns risk, and it quietly derails more retirement plans than almost any other factor.

What Is Sequence-of-Returns Risk (in Plain English)?

Imagine two retirees with identical portfolios who earn the same average return over 20 years.

One experiences a major market decline in the first few years of retirement. The other experiences that same decline much later.

The retiree hit early ends up with significantly less money.

Why? Because withdrawals taken during down markets lock in losses. You’re selling assets at depressed prices while your portfolio is at its weakest. Even strong future returns may not be enough to fully recover.

This is why early retirement losses can be so damaging — they shrink the base your future growth depends on.

Why the First Five Years Matter So Much

During your working years, market downturns are inconvenient but manageable. You’re adding money, not withdrawing it.

Retirement flips the equation.

In the early years, you’re:

• Taking regular withdrawals
• Adjusting to a fixed or semi-fixed income
• Often more emotionally reactive to market swings

A major downturn during this window can force painful decisions — cutting spending, selling investments at the wrong time, or abandoning your plan altogether.

The goal isn’t to avoid market volatility forever. It’s to survive the early years without doing permanent damage.

The Bucket Strategy: A Simple Defense

One of the most effective ways to manage sequence risk is the bucket strategy.

Instead of viewing your portfolio as one big pile of money, you separate it by time horizon:

• Short-term bucket: Several years of living expenses in cash or very conservative assets
• Intermediate bucket: Moderately conservative investments designed to refill the cash bucket
• Long-term bucket: Growth-focused assets meant to ride out market volatility

When markets fall, you draw from the short-term bucket instead of selling stocks at depressed prices. This gives your long-term investments time to recover — which is exactly what history shows they tend to do.

Flexible Withdrawals Matter More Than You Think

Rigid withdrawal rules can amplify sequence risk.

Instead of pulling the same dollar amount every year no matter what, retirees who build in flexibility — even modest flexibility — often see dramatically better outcomes.

Examples include:

• Temporarily reducing withdrawals after a down year
• Skipping inflation increases during market stress
• Using portfolio performance as a guide rather than a fixed formula

Small adjustments early can prevent large problems later.

Rebalancing: The Discipline Most People Skip

Rebalancing sounds boring, but it’s one of the most powerful risk-management tools available.

When markets rise, disciplined rebalancing trims gains and builds safety. When markets fall, it encourages buying at lower prices — not selling in panic.

Without rebalancing, portfolios tend to drift toward higher risk right before downturns and lower growth right after them — the opposite of what retirees want.

The Real Goal of the Early Retirement Years

The first five years of retirement aren’t about maximizing returns.

They’re about protecting optionality — the ability to let your plan work without being forced into irreversible decisions.

With the right structure, downturns become manageable instead of catastrophic.

That’s the difference between reacting to markets and retiring on your terms.