How a bad first decade can affect retirement
A market decline is especially damaging when it happens near the beginning of retirement. Losses reduce the portfolio while withdrawals remove additional shares, leaving less money available to participate in a later recovery.
Written by James Wilson · Reviewed August 3, 2026 · Educational information, not individualized advice
The order of returns begins to matter after withdrawals start
Before withdrawals, two portfolios receiving the same annual returns in a different order generally finish with the same value. During retirement, the result changes because money leaves the account every year. This is called sequence-of-returns risk.
A retiree who sells investments after a decline permanently removes shares that could otherwise recover. Strong returns later apply to a smaller balance. The same weak years arriving after several strong years may be easier for the portfolio to absorb.
A simplified illustration
Consider two fictional retirees who each begin with $600,000 and withdraw $40,000 at the end of every year. Both experience exactly the same set of 10 annual returns: −20%, −10%, 0%, 5%, and six years of 8%. Only the order changes. Taxes, fees, inflation, and investment differences are omitted so the sequence effect is easy to see.
| Same 10 returns, different order | Weak years first | Strong years first |
|---|---|---|
| Starting balance | $600,000 | $600,000 |
| Annual withdrawal | $40,000 | $40,000 |
| Returns used | −20%, −10%, 0%, 5%, then six 8% years | Six 8% years, 5%, 0%, −10%, then −20% |
| Balance after year 10 | $169,613 | $368,368 |
The returns and total withdrawals are identical, yet the strong-first portfolio finishes with about $198,755 more. The difference comes entirely from when losses occur relative to withdrawals.
Why the first decade is especially important
- The portfolio is often largest. A percentage loss applies to more dollars.
- Withdrawals may be highest relative to dependable income. Social Security or pensions may not have started yet.
- There is less room to wait. Spending still has to be funded while markets recover.
- Inflation can compound the problem. Rising costs may require larger withdrawals after losses.
- Taxable withdrawals can add friction. More money may need to leave an IRA to cover spending plus taxes.
How this planner tests the risk
The regular deterministic projection applies one predefined long-term return path and is useful for understanding the calculation. Retirement Risk Analysis asks a different question by testing the same plan across 1,000 seeded futures made from multi-year historical market and inflation sequences.
Review more than the middle balance. Compare:
- Modeled probability of covering spending through the horizon and ending ages
- The Very Cautious balance, which about 9 out of 10 modeled futures finished above
- The typical first age with a spending shortfall among paths that experienced one
- The typical total amount of spending those shortfall paths could not fund
Ways to test resilience
These are planning experiments, not automatic recommendations. Test how the outcome changes when you:
- Reduce discretionary spending during weak markets
- Keep a larger amount of near-term spending in cash or high-quality short-term assets
- Delay retirement, add earned income, or delay a large optional purchase
- Compare Social Security claiming ages and the withdrawals required while waiting
- Use a diversified allocation consistent with the risk you can tolerate
- Revisit the plan regularly instead of treating the original projection as fixed
Each response has tradeoffs. Holding more cash can reduce expected growth; working longer may not be possible; and reducing spending may affect quality of life. The goal is to understand which adjustments are available before a difficult market arrives.
Related guides
Test the difficult years, not only the average
Load a sample plan, run Retirement Risk Analysis, and compare how often spending remains funded through the ages that matter.
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