I want to tell you about a conversation we had with a client — we'll call him Dave.
Dave had done everything right. Saved consistently for 30 years, invested thoughtfully, never panicked during the downturns. He retired at 63 feeling great about where things stood.
Then the market dropped — right at the start of his retirement.
Not a crash. Just a bad year. The kind that, if you're still working, you barely notice because you're not touching the money. But Dave was pulling income now. Every month, he was selling shares — at lower prices — to pay his bills.
That's sequence of returns risk. And it's one of the most under-discussed risks in retirement planning.
So what exactly is it?
Most people spend their working years focused on average returns. And that makes sense — when you're accumulating, a bad year can often be smoothed out over time. The market drops, you keep contributing, you buy shares at lower prices, and eventually the market recovers.
Retirement flips that equation.
When you're taking money out, the order of returns can matter just as much as the average. Two people can retire with the same portfolio, experience the same average return over 20 years, and end up in completely different places — just because of when the bad years happened.
The person who experienced stronger returns in the early years may be better positioned.
The person who encounters market declines in the first few years while pulling income may face challenges that are harder to recover from.
Why this matters more than people realize
Many retirement projections assume a smooth, average return every year. Real markets don't work that way.
When you're drawing income and the market drops 20%, you're not just losing 20% on paper — you're locking in losses by selling. And you have fewer shares left to recover when the market bounces back.
Over time, this can quietly affect how long a portfolio may last - sometimes by years - depending on market conditions, withdrawal rates and other factors.
What we focus on when planning for it
The goal isn't to eliminate this risk — that's not really possible. The goal is to reduce the likelihood of being forced to sell investments during down markets.
In practice, this may involve structuring a portfolio with different purposes in mind. Some assets are intended for long‑term growth. Others may be positioned to provide more stability. Some may be earmarked to support near‑term income needs, so longer‑term investments may have more time to recover during market downturns.
No approach can guarantee outcomes, but thoughtful planning can help manage trade‑offs and uncertainty.
If you're getting close to retirementThis is the kind of thing many people don't think about until they're 2-3 years out from retirement — and by then, it becomes one of the most important conversations to have.
If you've been wondering how your plan might hold up if the market doesn't cooperate early on, it might be worth taking a closer look at how everything is structured. We have that conversation a lot, and it's usually pretty eye-opening.
The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment or tax advice. You should consult with appropriate counsel, financial professionals, and other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.