Sequence of Returns Risk: What Washington Retirees Need to Know Before They Stop Working
Two retirees. Same portfolio, $2 million each. Same annual withdrawal, $80,000 per year. Same long-term average return, 5 percent annually over 20 years.
Same inputs. Same math. They should end up in roughly the same place.
They don't.
One finishes with approximately $2.4 million. The other ends up roughly $1.7 million behind that, close to running out of money entirely.
The only thing different between them was the order in which the returns arrived.
That is sequence of returns risk. And it is one of the most important retirement planning concepts most people have never heard explained clearly.
Why the Math Changed the Day You Stopped Contributing
For most of the working years, market volatility was manageable. A bad year meant buying shares at lower prices. A market crash meant more shares at a discount. Time healed everything, because contributions kept coming and compound growth did the rest.
That math changes completely the day you stop contributing and start withdrawing.
Now you are selling shares instead of buying them. A market decline no longer means buying at a discount. It means selling at a loss to fund next month's expenses. When the market recovers, and historically it does, you recover with fewer shares than you started with, because you sold them at the lows to pay your bills.
This asymmetry is the entire problem. The same volatility that was your friend during accumulation becomes a structural threat during the withdrawal phase, especially in the early years. Understanding how much risk a portfolio carries looks very different once withdrawals begin.
The Retirement Red Zone
Research consistently identifies a window spanning roughly five years before and five to ten years after retirement as the most dangerous period for a portfolio. It has been called the fragile decade, the retirement risk zone, and the Retirement Red Zone.
During this period, the portfolio is at or near its peak value. Withdrawals have begun. And any losses have the longest possible time to compound against the plan.
A market decline in this window does two damaging things at once. The declining market reduces the portfolio value. Withdrawals reduce it further at the same time. The portfolio base shrinks in a way that is difficult to recover from, even when markets return to their previous levels.
Wade Pfau, Ph.D., a professor of retirement income at The American College of Financial Services, has quantified this directly. His research found that the returns in the first ten years of retirement account for approximately 77 percent of the final retirement outcome. The first decade is not just the beginning. It is most of the result.
The $1 Million Retiree Who Stayed the Course
A retiree with $1 million in a broadly diversified portfolio retired on January 1, 2000, and began taking 4 percent annual withdrawals, $40,000 per year adjusted for inflation. Sound, conventional planning.
Then came the dot-com crash. The portfolio declined significantly. Withdrawals continued, because there were bills to pay regardless of what the market was doing. The portfolio partially recovered. Then 2008 arrived, with the market again declining sharply, and withdrawals still going out every month.
By 2009, that portfolio was worth approximately $380,000. Less than 40 percent of what they started with nine years earlier.
The market's long-term returns over that full period were not catastrophic. They were average. The problem was not the average. It was the sequence, two major declines, both while withdrawals were forcing share sales at the lows.
This is not a worst-case scenario. It is what happened to a retiree who did most things right, but retired into the wrong zone at the wrong time.
Same Return, Different Outcome, The Math That Matters
The reason this is so difficult to understand intuitively is that we are trained to think about average returns. If the market averages 6 percent over 30 years, a 6 percent average portfolio should be fine.
The problem is that a 6 percent average can be achieved with completely different sequences. Good early years followed by bad late years produces a very different outcome than bad early years followed by good late years, when you are withdrawing throughout.
In the $2 million hypothetical, both retirees earn a 5 percent average return over 20 years. Both take $80,000 per year in withdrawals.
The retiree who gets strong returns in the early years sees their portfolio grow initially, which means their withdrawals are a small percentage of an expanding base. Even when bad returns arrive later, the portfolio is large enough to absorb them.
The retiree who gets bad returns in the early years sees their portfolio shrink while withdrawals are also reducing it. When good returns finally arrive later, the base is permanently smaller. The same percentage return on a smaller base produces less growth. The gap compounds year after year.
Same average. Different sequence. One finishes with $2.4 million. The other is $1.7 million behind.
Research confirms this. Morningstar's 2026 retirement income analysis found that retirees who experienced poor returns in their first five years and did not adjust spending were far more likely to exhaust their portfolios entirely, regardless of what long-term averages looked like.
Why 2026 Is a Good Time to Understand This
This is not a crisis article. But context matters.
The S&P 500 delivered an 18 percent total return in 2025, following two other strong years. As of spring 2026, the index is down modestly year to date, valuations remain elevated, and market uncertainty has been notably higher than the preceding years suggested.
Research confirms that entering the Retirement Red Zone after a prolonged bull market carries specific risks. When valuations are high and recent gains have been strong, the probability of mean-reversion is elevated, which is exactly when early retirees who are already withdrawing are most exposed.
This does not mean a crash is coming. Nobody knows that. What it means is that retirees in the five years before or after retirement right now are in the zone where the sequencing conversation matters most, and where having a guaranteed income floor in place before a decline is far more valuable than trying to build one after.
What Actually Protects Against It
Three strategies reduce sequence of returns risk. None requires predicting the market.
A Guaranteed Income Floor
A guaranteed income floor from Social Security, pension income, or guaranteed income products that cover essential monthly expenses means the investment portfolio does not need to produce income in a down market. If the bills are paid without touching the portfolio, the portfolio can be left alone to recover rather than sold at the lows.
For Washington retirees, Social Security benefits go further in after-tax terms than in most states because Washington has no state income tax. A dollar of Social Security income in Washington is a dollar kept. That structural advantage means a strong guaranteed income floor here has proportionally more impact than the same dollar amount in a taxing state.
The size of the gap between guaranteed income and essential monthly expenses is the measure of how vulnerable a retirement plan is to sequence risk. A household whose Social Security and pension cover 80 percent of essential expenses is in a fundamentally different position during a market decline than a household whose essential expenses depend almost entirely on portfolio withdrawals.
A Safe Money Buffer
Holding one to three years of expected expenses in safe, accessible assets, such as savings accounts, short-term CDs, or similar instruments that do not decline with the market, provides cash flow during a market decline without requiring investment liquidation. The portfolio sits through the decline intact, without forced selling, while the buffer funds near-term expenses.
When the market recovers, the portfolio has recovered with it, rather than recovering from a smaller base.
Spending Flexibility
Retirees who can reduce discretionary spending when markets decline and increase spending when markets are strong reduce the damage from bad early sequences significantly. Research by Guyton and Klinger found that applying simple spending guardrails, cutting distributions by 10 percent when the withdrawal rate runs high and raising them when it runs low, can support initial withdrawal rates well above the traditional 4 percent rule with very high probabilities of plan success.
This works because it prevents the compounding of forced sales during declines. The portfolio is protected by the flexibility of the spender, not by the performance of the market.
The Question Worth Asking Before You Retire
If the market declined 30 percent in your first year of retirement, how would your monthly income be affected?
If your essential expenses are covered by guaranteed income that does not move with the market, the answer is: not much.
If your essential expenses depend largely on portfolio withdrawals, the answer may be: significantly. You would need to either sell investments at reduced prices, cut spending meaningfully, or both.
The goal is not eliminating all market exposure from a retirement portfolio. That creates its own long-term problem with inflation. The goal is ensuring that a bad sequence in the early years does not force the sale of investments at the worst possible moment to cover bills that cannot wait for the market to recover.
That is a structural question about income sources and spending, not a prediction about markets. And it has a specific answer for every household that takes the time to look at the actual numbers.
Find Out How Your Retirement Income Plan Holds Up in a Down Market
A retirement income review looks specifically at how your income sources, guaranteed floor, and portfolio withdrawal strategy interact, and what the picture looks like if the market declines in year one. Complimentary. No investment products pitched.
You can also take the Retirement Income Clarity Assessment to see which areas of your retirement plan deserve a closer look.
Michael Gurr, Medicare and Retirement Specialist
University Place, WA · (253) 880-6527
Have Questions About Sequence Risk and Your Retirement Plan?
Leave your name and number. Michael will follow up within one business day.
Frequently Asked Questions
What is sequence of returns risk in retirement?
What is the Retirement Red Zone?
Why does the market always coming back not protect retirees?
How can retirees protect against sequence of returns risk?
What is the current safe withdrawal rate and how does sequence risk affect it?
Michael Gurr is a licensed Medicare and retirement advisor serving Pierce County and Western Washington.