Why Early Losses Hurt Your Retirement Money

Why Early Losses Hurt Your Retirement Money

Sequence of returns risk means this: losing money in the market hits you harder when you are already pulling cash out of your savings. The order of gains and losses changes how long your money lasts, even when the average return is the same. A crash in year one of retirement does more damage than the same crash in year fifteen.

What the Phrase Actually Means

Break it into the words you already know.

• Returns: how much your investments grow or shrink in a year. A 10% return means a $100 pile becomes $110. A -10% return means it drops to $90.
• Sequence: the order those yearly numbers arrive in.
• Risk: the chance the order comes in a way that hurts you.

When you are still working, a bad year and a good year cancel out. You keep putting money in. The order barely matters.

But once you retire and start taking money out, order matters a lot. If losses hit first, you sell more shares at low prices to cover your spending. Your pile shrinks. Then even good years have fewer shares to grow. You never fully recover.

This is the whole idea. No jargon needed after this.

A Plain Example With Real Math

Let's say you start retirement with $500,000. You pull out $40,000 at the start of each year to cover your bills. You look at what happens over 10 years. The average yearly return in both stories is the same: about 6.8%.

The only difference is the order.

Year	Good Order Return	Bad Order Return
1	+20%	-8%
2	-8%	+20%
3-10	+7% each year	+7% each year

Here is what happens step by step. You subtract $40,000 first, then apply that year's return.

Good order (gains come first)

Year	Start of year after withdrawal	Apply return	End of year
1	$500,000 - $40,000 = $460,000	× 1.20	$552,000
2	$552,000 - $40,000 = $512,000	× 0.92	$471,040
3	$471,040 - $40,000 = $431,040	× 1.07	$461,213
4	$461,213 - $40,000 = $421,213	× 1.07	$450,698
5	$450,698 - $40,000 = $410,698	× 1.07	$439,447
6	$439,447 - $40,000 = $399,447	× 1.07	$427,408
7	$427,408 - $40,000 = $387,408	× 1.07	$414,526
8	$414,526 - $40,000 = $374,526	× 1.07	$400,743
9	$400,743 - $40,000 = $360,743	× 1.07	$385,995
10	$385,995 - $40,000 = $345,995	× 1.07	$370,215

Bad order (losses come first)

Year	Start of year after withdrawal	Apply return	End of year
1	$500,000 - $40,000 = $460,000	× 0.92	$423,200
2	$423,200 - $40,000 = $383,200	× 1.20	$459,840
3	$459,840 - $40,000 = $419,840	× 1.07	$449,229
4	$449,229 - $40,000 = $409,229	× 1.07	$437,875
5	$437,875 - $40,000 = $397,875	× 1.07	$425,726
6	$425,726 - $40,000 = $385,726	× 1.07	$412,727
7	$412,727 - $40,000 = $372,727	× 1.07	$398,818
8	$398,818 - $40,000 = $358,818	× 1.07	$383,935
9	$383,935 - $40,000 = $343,935	× 1.07	$368,010
10	$368,010 - $40,000 = $328,010	× 1.07	$350,971

After ten years the good order leaves you about $370,000. The bad order leaves you about $351,000. That is roughly $19,000 less, just from the order. Same starting pile. Same average return. Same spending.

Now stretch this to a 25- or 30-year retirement. The gap widens every year. People who plan with a single "average return" miss this. Our 4% rule guide walks through how the rule works and where this problem sneaks in.

Why Near-Retirees Feel This Most

If you are five or fewer years from quitting work, you are in the window where sequence risk bites hardest. You have spent decades building your savings, and now you will switch from adding to pulling out. A crash in this stretch means you sell investments while they are down, and the pile never gets the chance to grow back to full size.

Once you are deep into retirement, say year 15 or later, you have already survived the early withdrawals. You are pulling a smaller slice from a base that has had more time to grow. A loss stings, but it is less likely to push you to running out of money.

The risk also changes depending on which country's public benefits you will draw and when. If you retire before Social Security eligibility, you lean harder on your own savings during those gap years. In Canada, CPP and OAS have their own start ages, and delaying OAS to 70 raises the monthly payment. Those gap years between quitting and benefits are exactly when sequence risk does the most damage. A tool like When Can I Retire works out the age you can retire and shows every step of the math, including the years before Social Security or CPP and OAS kick in, so you can see whether your plan survives a rough first few years.

What You Can Think About (Not a Prescription)

Nobody can predict the order of market years. You do not have to panic. But you can plan with the possibility in mind.

Keep a cash or short-term bond cushion. Many planners suggest holding one to three years of spending in money-market funds, GICs, or Treasury bills. That way a crash in year one does not force you to sell stocks at a low price. You spend your cushion and let the stocks recover. You can find current rules and rates at TreasuryDirect.gov.

Be ready to pull back on spending in a bad year. Spending $3,000 a month instead of $3,500 for two years can protect your pile for decades. A guardrails withdrawal strategy gives you simple rules for when to cut back and when to spend a little more, based on how your portfolio is doing.

Stagger when you claim public benefits. If you can delay Social Security or OAS even a year, you reduce how much you must pull from savings during the riskiest early window. On the US side, the Medicare rules at medicare.gov matter if you are between 62 and 65 and losing employer health coverage, because that gap adds real costs to your first few retirement years.

Model a rough start. Rather than plugging in one flat 7% return, run your numbers as if years one through three are negative. If you still think your money lasts, your plan has more room to breathe. If it does not, you now know exactly how much extra you need or how much longer you need to work.

A Word on Fear

Worried that a crash is "coming" is not a strategy. You cannot time the market. Sequence risk is real, but it is a planning risk, not a prediction. You build a buffer, set a spending plan with some give, and you accept that some years will be ugly. The people who weather it best are not the ones who dodged every loss. They are the ones who built enough slack into the plan that a few bad years do not force permanent cuts.