We often hear that the stock market has averaged a certain return over the long term. That history is helpful, but retirement planning isn’t built on averages alone.
Retirement isn’t lived on a spreadsheet. It’s lived one year at a time, one decision at a time.
In the first decade of retirement, when investment returns occur can be just as important as what those returns average over time.
What Most Return Assumptions Miss
Most retirement projections are built around an average annual return. The challenge is that retirement rarely unfolds the way those assumptions expect.
Many projections assume:
- You’re not withdrawing money.
- You’re investing over a long period.
- Market fluctuations have time to even out.
Retirement changes those assumptions.
Once you begin taking income from your portfolio:
- Withdrawals continue regardless of market conditions.
- The timing of market gains and losses matters.
- The early years of retirement can have a lasting impact on your long-term plan.
That’s why average returns alone don’t tell the whole story.
What Is Sequence of Returns Risk?
Sequence of returns risk refers to the impact of the timing of market returns.
Imagine two retirees who earn the same average return over retirement. On paper, their results look identical. In real life, they may have very different experiences.
The difference often comes down to two factors:
- Whether market downturns happen early or later in retirement.
- How much is being withdrawn during those periods.
When you’re taking income during a market decline, you’re often selling investments at lower values. That leaves fewer dollars invested when markets recover.
According to Morningstar, poor market performance early in retirement can significantly affect the long-term sustainability of a retirement portfolio, even if long-term average returns eventually meet expectations.
Why This Matters for Both Spouses
This isn’t just an investment concept. It affects the decisions you’ll make throughout retirement.
The early years of retirement are often when families:
- Travel more.
- Spend more on experiences.
- Make important housing or healthcare decisions.
- Adjust to living on retirement income instead of a paycheck.
In many families, one spouse has handled most of the financial decisions before retirement. As retirement begins, it’s important that both understand where income comes from and how the plan is designed to work.
A plan that accounts for sequence risk can help support:
- More consistent income.
- Decisions based on long-term planning instead of short-term market headlines.
Greater confidence that both spouses understand how retirement income is expected to continue.
How Planning Can Help Address This Risk
Rather than depending on average returns alone, a retirement income plan can be structured to reduce the impact of poor market timing.
That may include:
- Maintaining cash or short-term reserves for planned withdrawals.
- Using flexible withdrawal strategies when markets are volatile.
- Layering income from multiple sources.
- Reviewing and adjusting the plan as markets, spending needs, and life circumstances change.
None of these approaches removes market risk.
They help reduce the impact of a difficult market early in retirement.
The goal isn’t to predict markets; it’s to reduce reliance on perfect timing.
A More Helpful Way to Think About Returns
Instead of asking:
“What average return do we need?”
A better question may be:
“How does our plan hold up if the first few years don’t go as expected?”
That question shifts the focus from predicting markets to building a plan that can adapt when markets don’t cooperate.
Confidence doesn’t come from knowing what the market will do next. It comes from knowing your plan doesn’t depend on getting the timing exactly right.
Next Steps
If your retirement plan is based primarily on long-term averages, it may be worthwhile to review its performance under less favorable market conditions early in retirement.
Reviewing how your plan performs across different market scenarios can help you understand where it may be strong and where adjustments might be warranted.
If you have questions about how sequence-of-returns risk could affect your retirement income, let’s review your plan together and see how it’s designed to respond when markets become unpredictable.
Retirement planning isn’t just about reaching an average return. It’s about creating a plan that can support you through a variety of market conditions.