Participating in an Ironman race requires months, if not years, of rigorous training, discipline and mental dexterity. Preparation is not limited to purely triathlon training, but crosses over into the efficiency of navigating the transition zones (from swimming to biking, and from biking to running). Successful triathlon participants train their bodies to perform these transition activities efficiently, despite being under significant pressure. The same can be said for an individual who worked tirelessly in reaching their retirement goals, as they transition from receiving a consistent paycheck to the reliance on portfolio withdrawals to support income needs. This article will evaluate how “sequence of return risk” can impact retirement income while also exploring potential withdrawal strategies to mitigate this risk and sustain long-term success.

Retirement Headwinds

Retirement provides new and sudden headwinds not previously experienced, shifting from a paycheck to relying on the investment portfolio and alternative income sources to support your standard of living. The portfolio is now burdened with the full steam of retirement spending, resulting in retirees often experiencing a measurable shift pertaining to their risk tolerance and behavioral mindset. However, retirement planning should not begin the day of retirement, but similarly to Ironman athletes, well in advance of the event. The goal is to orchestrate a financial plan to control as many elements in the process as possible, but as we all know, the market often throws curveballs – one being the sequence of return risk. While often slicing like a double-edged sword, sequence of return risk evaluates the timing impact positive or negative returns have on the long-term growth and sustainability of portfolio assets. In the next section, we will discuss how differentiating retirement years could impact portfolio sustainability.

The next chart illustrates two identical investors with a portfolio asset allocation of 60% equities and 40% fixed income, retiring 12 months apart (1973 vs. 1974), and spending $50,000 annually (adjusted for inflation) for 30 years. As a result of the sequence of market returns with a 1973 start, this retiree faces a more challenging retirement journey due to starting out in a negative market cycle. Based upon the assumptions, the 1973 retiree will exhaust their portfolio assets in approximately 20 years. The impact of depreciation in the portfolio through withdrawals for income replacement, coupled with a sequence of unfavorable returns, negatively impacts the sustainability.

With the second retiree entering retirement just one year later (1974), the portfolio is still negatively impacted, but sustains a higher portfolio balance that further supports long-term sustainability. We also recognize that an unfavorable sequence of return risk runs beyond simply a dollar and cents point of view, as arguably, an equal risk associated with an early downturn in retirement is the behavioral impact to our 1973 retiree. Our reactionary human nature triggers a form of hyper risk aversion, extrapolating focus to the potential of losses (10x in certain studies) comparatively to that of gains. However, the time to remain disciplined is now and making an errant move to cash could potentially hinder the success of the retirement journey altogether.

The previous chart illustrates how a major market downturn can undermine long-term portfolio growth and, additionally, how our behavioral pitfalls could accelerate the dramatics of the situation. The stock market declined approximately 51% from October 2007 to March 2009 and in the above three scenarios, each portfolio had a different outcome based upon the retiree’s portfolio response. The gold line reflects a move to cash following the negative market performance, only to reinvest in the market after five years of sitting on the sidelines – Greenleaf Trust would not recommend this strategy. The red line embraces a more de-risking type of strategy, shifting the asset allocation to emphasize fixed income (60 percent) compared to stocks (40 percent). While this strategy could be effective, the asset allocation of the portfolio should not change based upon short-term market or economic events, but only as a result of financial goals changing amidst your wealth management plan. Lastly, we arrive at the blue line, a portfolio that was rebalanced throughout the negative market cycle, but remained invested throughout. The ending result is a portfolio that would have recovered fully by 2013.

Remaining Disciplined with Defined Spending Strategies

A negative sequence of return risk provides an opportunity to re-evaluate your original financial planning framework, focusing beyond the aspects of short-term market or economic negativity and reflecting on your broader goals-based strategy. While a negative sequence of return risk certainly poses a threat, the means of portfolio diversification, proper estate planning, and a disciplined spending approach help to mitigate the potentially negative impact. We know that controlling the market is unattainable; however, we do have the ability to dictate our portfolio withdrawal requirements.

Two dynamically adjusting spending strategies often utilized over the course of several market cycles are implementing a ratcheting rule or a guardrail approach. The ratcheting rule is straightforward — spending is higher when favorable sequence of returns occurs in the market and are reduced during a negative sequence of returns. For example, a retiree might implement a 4% withdrawal rate initially, but may increase spending by 8% once the portfolio achieves a certain performance threshold. During unfavorable sequences, the spending rate is low enough to sustain within the portfolio, but with positive sequences, the spending increase will help to consume excess retirement assets.

The guardrail approach is structurally similar and analogically, is best described with picturing a bowling alley. No need to admit if you still utilize bumpers today or when only bowling with the grandkids, but these guardrails are designed to keep your ball rolling down the middle of the lane as best as possible. The guardrail approach is the same, utilizing a floor and ceiling to more efficiently control spending thresholds during positive or negative market environments with the focus being long-term sustainability. The spending approach dynamically adjusts accordingly to portfolio performance with the intent to maintain a straightened path within the designed thresholds. With any sustainable withdrawal strategy, revisiting your withdrawal rate regularly and adjusting as appropriate is imperative to long-term success.

Over the past 150 years we have been through wars, pandemics, recessions, depressions, natural disasters, political upheaval, etc. What happened with each? The market met its floor and recovered. The sequence of returns risk is an extension of these potential portfolio impactors, posing challenges to a retiree during a bad sequence, but alternatively, providing an opportunity with compounding portfolio growth with positive sequences. As evidenced by recent markets, the short-term can be exceedingly unpredictable. Over the long-term, however, we know your wealth management plan was created and customized with very specific goals and objectives and maintaining discipline, has proven to be the best approach for creating and sustaining wealth. We at Greenleaf Trust look forward to continuing to work with you and your family for many generations to come.


Harry S. Margolis, J. (2020). The Three Biggest Risks to Retirement Planning and How to Avoid Them. Investments and Wealth Monitor, 12-21.