Here's a scenario we walk through often with families in Maryland, Virginia, and Washington DC: two retirees each average the same 7% annual return over 20 years — but one retires right before a market downturn, and the other retires right after one. Despite identical average returns, their outcomes can differ dramatically. This is sequence-of-returns risk, and it's one of the most under-discussed threats in retirement income planning.
Why Average Returns Can Mislead Retirees
During your working years, when you're contributing to a TSP or 401(k), market downturns are actually beneficial — you're buying more shares at lower prices. In retirement, when you're withdrawing rather than contributing, a downturn forces you to sell more shares at depressed prices to generate the same income, permanently reducing your remaining balance's ability to recover.
The Danger Zone: Five Years Before and After Retirement
Research consistently shows the five years before and after your retirement date carry outsized influence over how long your portfolio lasts. A downturn in this window does far more damage than the same downturn occurring mid-career or a decade into retirement, once your balance has stabilized around your withdrawal rate.
Key Takeaways
- Identical average returns can produce very different outcomes depending purely on when the losses occur.
- Withdrawing during a downturn locks in losses in a way that contributing during one does not.
- The five years before and after retirement carry the greatest sequence risk.
- Downside-protected strategies and a cash reserve 'bucket' can reduce forced selling during a downturn.
How Downside Protection Helps
principally protected S&P 500 index strategies are designed specifically to address this risk — offering market-linked growth potential while protecting principal from downturns, so a bad market year doesn't force you to sell depressed assets to fund your lifestyle. For federal retirees managing a TSP qualified IRA rollover alongside a pension, this can meaningfully smooth out the ride.
Ledger Note
A retiree who maintains one to two years of planned withdrawals in stable, protected assets — rather than drawing entirely from market-exposed accounts — can avoid forced selling during the exact years a downturn would otherwise do the most lasting damage.
Building a Bucket Strategy
Many of our wealth management for families plans use a "bucket" approach: near-term spending held in stable, protected assets; mid-term needs in a moderate mix; and long-term growth allocated more aggressively. This structure directly addresses sequence risk without requiring you to predict market timing.
It's not the average return that determines your retirement — it's the order those returns arrive in.
A Regional Note for DC-Metro Business Owners and Taxpayers
Business owners and taxpayers across Maryland, Virginia, and Washington DC face different state filing requirements, business tax structures, and, in some cases, different IRS service center handling depending on residency and business location. For retirement income planning specifically, understanding which state and local obligations apply — on top of federal rules — is essential before finalizing any strategy. A certified financial fiduciary in Maryland experienced across all three jurisdictions in the DC metro area can help make sure a plan built for federal compliance doesn't overlook a state-level obligation.
Frequently Asked Questions
Can I eliminate sequence-of-returns risk entirely?
Not entirely, but it can be significantly reduced through diversification, downside-protected strategies, and maintaining a cash or stable-asset reserve to avoid forced selling during downturns.
Does sequence risk matter if I have a pension?
It matters less if your pension covers most of your spending, but it still affects any portion of retirement income drawn from market-exposed accounts like TSP or IRAs.
What is a 'bucket strategy'?
An approach that divides your portfolio into near-term, mid-term, and long-term segments with different risk levels, designed to fund near-term spending without selling growth assets during a downturn.