A 20% market decline hurts at any age, but the damage can be much more serious when it happens just after you retire.
During your working years, falling markets may actually give you an opportunity to keep buying investments at lower prices. In retirement, the situation changes. Instead of adding money, you are usually withdrawing it to pay for housing, food, travel, healthcare, and other expenses.
That combination – market losses plus ongoing withdrawals – can permanently weaken a portfolio. This is why early market losses can damage long-term retirement income even when markets eventually recover.
The problem is known as sequence-of-returns risk: the order in which investment gains and losses occur becomes especially important once money is being removed from the portfolio.
Recent retirement research continues to show that the first several years can be particularly sensitive. Understanding the mathematics behind this risk can help retirees design withdrawals, cash reserves, and asset allocations that give their portfolios more opportunity to recover.
Early Losses Hurt Differently After Retirement
Before retirement, investment returns mainly affect the value of your accumulated savings.
Once withdrawals begin, two forces are acting on the portfolio simultaneously.
The market can reduce its value, while spending removes additional assets.
Morningstar describes this as sequence-of-returns risk and reports that retirees who suffer investment losses during the first five years of retirement face a significantly greater chance of exhausting their savings than those who avoid early losses.
Consider someone retiring with $1 million.
If the market immediately falls 20%, the balance drops to $800,000 before considering withdrawals. If the retiree also needs $50,000 for living expenses, substantially less capital remains available for the eventual market recovery.
A similar 20% decline occurring much later may be less damaging because the portfolio no longer needs to support as many future years of spending.
Same Average Return, Completely Different Outcome
One of the strangest things about sequence risk is that two portfolios can earn the same average investment returns yet produce dramatically different retirement outcomes.
The difference is simply the order of those returns.
Fidelity illustrates this with two hypothetical $1 million retirement portfolios. Each experiences the same set of annual returns and targets $50,000 of annual withdrawals, but the returns occur in reverse order.
In the scenario with weak returns early in retirement, the portfolio reaches zero by year 27. When stronger returns come first, the portfolio still holds more than $3 million after 30 years in Fidelity’s illustration.
The example is hypothetical, but it demonstrates an important point.
Average return alone does not tell you whether retirement income is sustainable.
When withdrawals are involved, timing matters.
Selling After a Decline Creates Permanent Damage
Suppose a retiree owns 10,000 investment units worth $50 each, creating a $500,000 portfolio.
If those investments fall to $40, the portfolio is now worth $400,000.
To generate $40,000 of spending before the decline, the retiree would have needed to sell 800 units. At the lower price, generating the same amount requires selling 1,000 units.
Those additional units disappear permanently from the portfolio.
Even if the market later returns to $50, fewer investments remain to participate in the recovry.
Schwab explains that withdrawing money during early market declines forces retirees to sell more assets to generate the same cash amount, leaving fewer investments available for future growth.
That is the mechanism that makes sequence risk so dangerous.
The market does not merely need to recover its percentage loss. The retirement portfolio must recover while continuously funding spending.
Recovery Mathematics Make Large Losses Harder to Fix
Investment losses also have an uncomfortable mathematical property: the percentage gain required to recover becomes larger as the decline gets deeper.
A 10% loss requires an approximately 11.1% gain to return to the starting value.
A 20% decline requires a 25% gain.
A 50% decline requires a 100% gain.
Now add retirement withdrawals to the calculation.
If a $1 million portfolio falls 30% to $700,000 and the retiree then withdraws $40,000, the remaining $660,000 would need to grow by roughly 51.5% simply to return to the original $1 million level.
That is why protecting against catastrophic early losses can be more important than maximizing every possible percentage point of return.
The portfolio needs enough growth to finance decades of retirement, but it also needs enough resilience to survive unfavorable timing.
High Withdrawal Rates Make Early Losses Worse
Market losses alone create pressure. Large withdrawals amplify it.
Imagine two retirees who both experience a severe market decline.
One needs only 3% of the portfolio for annual spending because Social Security and pension income cover most essential expenses. The other needs 7% because the investment portfolio funds nearly everything.
The second portfolio will generally experience more pressure.
Every large withdrawl during a downturn removes additional capital at exactly the wrong time.
Morningstar’s research on retirement income emphasizes that spending flexibility can help protect portfolios after weak early returns. Retirees who can temporarily reduce withdrawals leave more assets invested for a potential recovery.
This is why sustainable retirement planning considers spending and investments together.
The strongest portfolio cannot compensate indefinitely for a withdrawal rate that is simply too high.
Cash Reserves Can Reduce Forced Selling
One way to manage sequence risk is to keep enough liquid assets available so stocks do not need to be sold every time the market falls.
Cash does not normally provide the same long-term growth potential as equities, but it has another job: stability.
For example, a retiree might use cash reserves to cover some near-term expenses during a severe stock-market decline.
Schwab suggests that retirees consider maintaining roughly one year’s expenses in cash plus another two to four years of anticipated spending in relatively liquid, conservative investments.
That is one firm’s framework rather than a universal rule, but it illustrates the purpose of a retirement buffer.
Fidelity similarly points to cash, short-term bonds, annuities, and other dependable income sources as tools that may reduce the need to sell investments during weak markets.
The point is not to hold everything in cash.
It is to give volatile assets time to recover.
Balanced Portfolios Can Limit the Depth of Early Losses
Going into retirement with 100% of assets in stocks can create substantial volatility.
Stocks provide valuable long-term growth, but a severe bear market early in retirement can create exactly the type of sequence problem retirees want to avoid.
Morningstar’s research notes that equity-heavy portfolios are particularly exposed because stocks experience wider fluctuations. Balanced portfolios containing stocks and bonds can reduce volatility and, under some retirement scenarios, support more sustainable withdrawals.
This does not mean retirees should abandon equities.
A 25- or 30-year retirement still requires growth, especially as inflation increases future living expenses.
Instead, asset allocation should balance two competing objectives: protecting money needed soon while allowing longer-term capital to continue growing.
The correct balance depends on spending needs, guaranteed income, age, risk tolerance, and available reserves.
Flexible Spending Can Protect Future Income
Another powerful tool does not involve changing investments at all.
It involves changing spending.
Many retirement expenses are not equally important. Housing, insurance, food, and basic healthcare may be difficult to reduce quickly. Travel, gifts, renovations, and entertainment usually offer more flexiblity.
Suppose markets fall 25% during your second year of retirement.
Reducing discretionary spending from $25,000 to $15,000 for a year may leave another $10,000 invested while markets are depressed.
That reduction may seem modest, but avoiding repeated withdrawals during multiple weak years can materially improve the portfolio’s ability to recover.
Fidelity recommends building expense flexibility into retirement plans specifically because reducing withdrawals during market downturns can help manage sequence risk.
A sustainable retirement plan should therefore include rules for difficult markets before those difficult markets actually arrive.
Guaranteed Income Can Take Pressure Off the Portfolio
Social Security, pensions, and certain annuity income can also reduce dependence on investment withdrawals.
Suppose annual household spending is $70,000.
If $50,000 is already covered through reliable income sources, the portfolio only needs to produce $20,000.
Compare that with someone withdrawing the full $70,000 from investments.
During a major bear market, the first household has much more freedom to leave investments untouched or temporarily reduce discretionary spending.
Fidelity includes annuities among potential sources of dependable cash flow that can reduce the need to sell portfolio assets during market declines.
Guaranteed income does not eliminate investment risk, but it can reduce the amount of everyday spending exposed to market timing.
That can be especially valuable in the vulnerable opening years of retirment.
The First Five Years Deserve Extra Attention
Nobody can know when the next bear market will begin.
Retirees therefore cannot eliminate sequence risk by perfectly timing retirement.
What they can do is prepare for the possibility of poor early returns.
Morningstar’s 2025 research found that avoiding cumulative investment losses during the first five retirement years was strongly associated with lower chances of exhausting retirement savings later.
In its analysis, retirees who avoided early losses saw their failure risk decline substantially as retirement progressed.
That makes the opening years an important planning window.
Before retiring, it can be useful to stress-test the portfolio against scenarios such as an immediate 20% or 30% market decline, several years of weak returns, higher inflation, or unexpectedly large expenses.
If the plan still works under uncomfortable assumptions, retirement income is likely to be more resilient.
Early market losses can damage retirement income because retirees are doing something investors in the accumulation stage usually are not: continuously removing money from their portfolios.
When losses and withdrawals happen together, more assets must be sold at depressed prices, leaving less capital available for future recovery. That is why identical average returns can produce dramatically different retirement outcomes depending on their sequence.
The solution is not predicting the next bear market. It is building a plan that can survive one.
Review your withdrawal rate, maintain appropriate liquid reserves, diversify the portfolio, identify discretionary expenses that can be reduced, and account for reliable income sources.
Most importantly, stress-test the first several years of retirement. Protecting the portfolio during that vulnerable period can help preserve income for decades to come.
