Sequence of Returns Risk and Why Timing Matters

Key Points – Sequence of Returns Risk and Why Timing Matters

Why Sequence of Returns Risk Can Have a Big Impact on Retirees and Soon-to-Be Retirees
Could There Be a Recession in 2025?
Reviewing Past Market Trends
The Difference Between Retiring at the Beginning of a Down Market vs. Retiring at the Beginning of an Up Market
5-Minute Read

What Is Sequence of Returns Risk?

If you’re getting close to retirement or have already retired and a bear market occurs, would you be able to accomplish your goals throughout retirement without running out of money? According to Allianz Life’s 2025 Annual Retirement Study, 64% of Americans worry more about running out of money than death.₁ This is one of many reasons why we believe it’s critical to have a comprehensive financial plan that is stress tested against that possibility. Let’s review what sequence of returns risk is and why when you retire matters.

When Does Sequence of Returns Risk Typically Occur?

While running out of money in retirement is a legit concern for many people, it’s important to understand how sequence of returns risk can factor into the equation. Time may still be on your side if you’re still several years away from retirement, but the rules change once you transition from your accumulation years to your distribution years.

Once you retire, you’ll no longer have a paycheck from your employer to fall back on. What will happen if you take income from your retirement accounts and other investments during a down market and don’t have the proper diversification or income strategy? That’s one of many questions that we address in our Retirement Plan Checklist. Download your copy below to begin gauging your retirement readiness.

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With sequence of returns risk, it’s not just about planning for the possibility of a recession or a prolonged down market taking place during your retirement. The timing of the market downturn matters. We elaborated on that during an episode of America’s Wealth Management Show that was recorded on May 13, 2025. Our goal was to illustrate the difference between a recession occurring at the very beginning of someone’s retirement versus a recession taking place later on in retirement.

What Are the Chances of a Recession in 2025?

Leading up to that episode, market volatility had been one of the main themes of 2025 — with tariff negotiations being the primary catalyst. It was only a few weeks before that episode was recorded that Chief Executive’s CEO Confidence Index, which polls 277 CEOs in the United States, believed there was a 62% chance of a recession occurring in the following six months.₂ Fourteen percent of those surveyed believed there would be a severe recession.

Fast forward to June, and the same survey said there was only a 28% chance of a mild recession or slowdown in the following six months, and 0% thought there would be a severe recession.

FIGURE 1 – Recession Forecasts – Chief Executive CEO Confidence Index

Why When You Retire Matters

So, if you’ve been thinking about retiring some time in 2025, the recent market volatility might feel a bit uncomfortable. However, prolonged periods of economic uncertainty are more common than you might think. Let’s look back on market performance over the past 80-plus years to really illustrate the impact of sequence of returns risk and why timing matters.

FIGURE 2 – History of U.S. Bear and Bull Markets – Sequence of Returns Risk and Why Timing Matters₃

In Figure 2, the bull markets appear to be much more pronounced, have a longer duration, and go up much more than the bear markets. So just keep a long-term approach with your investments and you’ll be OK, right? Sometimes, it can be that simple during your accumulation years. But sticking to that long-term approach in retirement during a prolonged bear market can be very difficult.

Let’s focus specifically on the S&P 500’s performance from May 13, 2000, to May 13, 2025, in Figure 3.

FIGURE 3 – S&P 500’s performance from May 13, 2000, to May 13, 2025 – Kwanti

From May 13, 2000, to February 27, 2009, the S&P 500 was down nearly 40%. Could you imagine retiring at the beginning of 2000 and having someone tell you to just stick to a long-term approach with your investments after that nine-year period, which included the Dot-Com Bubble and Great Recession? However, from May 13, 2000, to May 13, 2025, the S&P 500 was up more than 540%.

Figures 2 and 3 highlight how markets are both cyclical and secular in nature. Cyclical markets experience shorter-term economic trends amid seasonal cycles, while secular markets tend to be fueled by long-term trends that aren’t easily impacted by short-term fluctuations. Both bull and bear markets are cyclical and secular, but it can be difficult to comprehend that during a long-term secular bear market.

Retiring at the Beginning of an Up Market vs. Retiring at the Beginning of a Down Market

As we wrap up this article on sequence of returns risk and why timing matters, let’s review one more example that shows the difference between retiring at the beginning of an up market vs. retiring at the beginning of a down market.

FIGURE 4 – What Is Sequence of Returns Risk – RetireOne₄

Figure 4 shows two investors that have a $100,000 investment and an average annual rate of return of 4%. Investor Blue withdrew $5,000 a year over 15 years and still had an investment value of $105,944 at the end of that 15-year period. Investor Green on the left also withdrew $5,000 a year over the same timeframe, but only had $35,889 at the end of the 15 years.

There was about a $70,000 difference between the two investors after 15 years, despite both having a 5% average annual rate of return. The big difference was that Investor Blue retired at the beginning of a 10-year bull market before a five-year bear market began, while Investor Green had the five-year bear market at the beginning of retirement prior to the 10-year bull market.

Planning for Sequence of Returns Risk

Hopefully these examples have helped with illustrating how sequences of returns risk works and why timing matters. Sequence of returns risk is real and we’ve seen it play out over different time periods.

So, what will happen if you end up retiring at the beginning of a down market? We want to prepare you for that possibility by building you a comprehensive financial plan that’s tailored to your goals and that’s been stress tested against economic cycles such as the Great Recession and Dot-Com Bubble.

Learn About What It’s Like to Have the Modern Wealth Advantage

We’re ready to deliver you the Modern Wealth Advantage while building your comprehensive financial plan. It’s important to understand that an investment plan is actually part of a financial plan. In addition to investment planning, our Advantage Offerings consist of tax planning, estate planning, and insurance planning. All those come together to build a financial plan that’s centered around your unique situation and goals.

When it comes to investment planning, it’s important to have a spending bucket strategy that’s structured for you to spend certain assets over short-term (0-3 years~), mid-term (3-10 years~), and long-term (10-plus years~) periods. But what assets should you be spending from and when? Do you have money in tax-deferred, taxable, and tax-free accounts or is most of your money in one tax bucket? So, you have spending buckets AND tax buckets!

If you have questions about how to develop a proper diversification or income strategy and plan for sequence of returns risk, start a conversation with our team below. Our team of professionals is here to help you build confidence to make informed decisions with your money.

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The views expressed represent the opinion of Modern Wealth Management a Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.