Follow Nick Bernardo on LinkedIn
Retirement planning tends to focus on the years of building: how much to save, how to invest, when the number is big enough to walk away. Less attention goes to the years immediately after. Those first two or three years of retirement are where the most consequential risks actually live, and the plan has to be built with that window specifically in mind.
Bad Markets Hurt More in Early Retirement Years
During your working years, a bad market is painful to watch but does not require action. The portfolio keeps compounding, and time absorbs the loss. Retirement changes that equation entirely. Once you are drawing income from the portfolio to fund your lifestyle, a market downturn has more immediate consequences. You are selling assets to pay for your life, and if those assets just dropped in value, you are locking in that loss.
The timing of a downturn matters far more than most people expect. A significant market decline ten or fifteen years into retirement, when the portfolio is larger, and withdrawals represent a smaller share of total assets, looks very different from the same decline in year one. The early years are when the portfolio is most vulnerable, and when a rough sequence of returns can permanently alter long-term outcomes.
The Numbers Behind the Risk
Consider a $1 million portfolio that loses 10% in the first year of retirement, dropping to $950,000. If the annual income need is $50,000, that withdrawal now represents a larger percentage of a smaller base than it would have the year before (Illustrative purposes only. Numbers approximate). Repeat that pattern across two or three consecutive down years, and the math becomes difficult to recover from, even when the market eventually turns.
This dynamic is called the sequence-of-returns risk. It is the reason a financial plan built on a straight-line average return of 7% misses something important. Looking back across market history, the S&P 500 has finished the year higher roughly three out of every four years. Up years average a gain of more than 21%. Down years average a loss of more than 13%.¹ The average can be right over a long period while the order of returns in the early years does serious damage. Planning that accounts only for average outcomes is not planning for retirement. It is planning for the best-case version of retirement.
A Structure That Absorbs the Shock
The practical answer to the sequence-of-returns risk is liquidity. When the portfolio includes enough in a lower-risk, accessible allocation to cover several years of retirement income, a market downturn does not force a sale. The equity portion of the portfolio can stay invested and recover on a longer horizon, while near-term income is drawn from the portion that does not swing with the market. This is about being intentional with the structure so different parts of the plan serve short-term income needs and long-term growth needs, and a bad year in the market does not force one to undermine the other.
The Part the Spreadsheet Cannot Measure
Monte Carlo analysis tests thousands of different sequences of market returns to show whether a plan holds up across the realistic range of outcomes, including the difficult ones. When done well, it can increase the likelihood of success even with a rough start to retirement.
Monte Carlo analysis can show a high probability of success on paper, but what it cannot do is make you believe it when markets are down, and you are drawing from the portfolio at the same time. That belief tends to come from having gone through the conversation before the difficult moment arrived, understanding how the plan was built and why, and having had time to ask questions and make adjustments while the stakes were lower.
Retiring with financial confidence and retiring with emotional confidence are two separate things. The planning process is where both get built.
If it’s been a while since your retirement plan was stress-tested against a difficult start, book a time with our team.
¹ Optionality, “S&P 500 Statistics,” 2026. https://www.optionalityhq.com/statistics/sp500-statistics.
Past performance is not indicative of future results. S&P 500 index returns are historical and do not represent the performance of any specific investment. It is not possible to invest directly in an index.