The Risk They Don't Mention

Most retirement planning focuses on one question: "Do I have enough?" But there's a second question that matters just as much: "What happens if the market crashes right after I quit?"

This is sequence of returns risk — the danger that poor investment returns early in retirement permanently damage your portfolio, even if long-term average returns are fine.

Why the Order of Returns Matters

When you're saving and investing, market crashes are actually helpful. You buy more shares at lower prices, and when the market recovers, you benefit from the growth. Dollar-cost averaging works in your favor.

But when you're withdrawing money, the math reverses. A market crash forces you to sell more shares to cover the same expenses. Those shares are gone forever — they can't participate in the recovery.

A tale of two retirees

Consider two people who both retire with $1,200,000 and withdraw $48,000 per year (4%).

Retiree A gets 8% returns for the first 5 years, then a -20% crash in year 6, then 8% returns after that. After 30 years, they still have over $2 million.

Retiree B gets a -20% crash in year 1, then 8% returns for 29 years. Same average return. After 30 years, they have about $800,000 — less than half.

Same average returns. Same withdrawal rate. Dramatically different outcomes. The only difference was when the crash happened.

Why Early Retirees Are More Vulnerable

The 4% rule was tested on 30-year retirement periods. If you retire at 40, you might need your money to last 50-60 years. That gives sequence risk more time to compound against you.

Additionally, early retirees typically have a higher percentage of their wealth in equities (for growth) and may not have Social Security or pensions to fall back on. Your portfolio is your entire income.

Five Ways to Protect Yourself

1. Build a cash buffer

Keep 1-2 years of expenses in a high-yield savings account. When the market drops, you spend from cash instead of selling investments at depressed prices. This gives your portfolio time to recover.

2. Use a flexible withdrawal strategy

Instead of rigidly withdrawing 4% adjusted for inflation every year, reduce spending during market downturns. Many early retirees use a "guardrails" approach: withdraw 4% in normal years, cut to 3.5% after a bad year, and increase to 4.5% after a great year.

3. Maintain income optionality

This is the biggest advantage early retirees have over traditional retirees. If the market crashes in your first year, you're 41, not 71. You can freelance, consult, or take a part-time job for a year or two. Even $20,000 per year of earned income during a downturn dramatically improves survival rates.

4. Use a bond tent

In the 5 years before and after retirement, increase your bond allocation to 30-40%. This reduces volatility during the most vulnerable period. After 5-10 years of retirement, you can shift back toward equities for long-term growth.

5. Consider a slightly lower withdrawal rate

Dropping from 4% to 3.5% reduces your annual income by $4,200 (on a $1.2M portfolio) but dramatically improves 50-year survival rates. For early retirees, this extra margin is often worth it.

How Much Extra Do You Need?

A common rule of thumb for early retirees: use a 3.5% withdrawal rate instead of 4%. That means multiplying your annual expenses by approximately 29 instead of 25.

For $48,000 per year in expenses:

4% rule (25x): $1,200,000
3.5% rule (29x): $1,371,000

The extra $171,000 buys significant protection against sequence risk. Whether it's worth the additional 1-2 years of working depends on your personal risk tolerance.

The Bottom Line

Sequence of returns risk is real, but it's manageable. A cash buffer, flexible spending, and income optionality address the vast majority of the risk. You don't need a perfect plan — you need a plan that can adapt.

Calculate your Quit Number to see where you stand. Then build in your buffer and make the leap with confidence, not just hope.

The Sequence of Returns Risk Nobody Talks About