The Biggest Retirement Planning Mistake (Even Financial Advisors Make)

You’ve done everything right. You saved consistently, invested responsibly, and built what looks like a solid retirement nest egg. On paper, you should be set for life. Yet there’s a quiet, often-ignored risk that can unravel even the best retirement plan—not because you didn’t save enough, but because of when market returns happen.

This risk has little to do with how much you earn or how disciplined you were. It’s about timing, and it has the power to drain a portfolio faster than most retirees expect.

The Hidden Retirement Killer: Sequence of Returns Risk

Sequence of returns risk refers to the danger of experiencing poor investment returns in the early years of retirement, precisely when you begin withdrawing money from your portfolio. While the average return over time may look perfectly reasonable, the order in which those returns occur can dramatically change the outcome.

During your working years, market downturns are usually a blessing in disguise. You’re contributing new money, buying more shares at lower prices, and giving your investments time to recover. Retirement flips that equation. Instead of buying, you’re selling—and selling during a downturn forces you to liquidate more shares just to cover the same expenses. Those shares are gone forever, leaving less capital to participate in future market recoveries.

A Tale of Two Retirees

Imagine two identical twins who both retire with $1 million and plan to withdraw $40,000 per year. They experience the same annual market returns over 30 years—the only difference is the order in which those returns occur.

The first twin enjoys strong market gains early in retirement and faces weaker returns later. After 30 years, their portfolio still holds roughly $1.8 million. The second twin faces market losses in the early years, followed by strong gains later. Despite identical long-term returns, their portfolio is depleted after just 23 years.

The difference isn’t intelligence or discipline—it’s timing. Early losses combined with steady withdrawals create a deficit that later gains simply cannot overcome.

Why Traditional Withdrawal Rules Fall Short

The well-known 4% rule is often treated as a universal solution, but it assumes relatively smooth returns and fails to fully account for real-world volatility. Markets don’t move in straight lines, and retirees don’t get to choose when bear markets occur.

History offers painful examples. Retirees who left the workforce in 2000 or 2008 entered retirement just as markets collapsed. Many followed “safe” withdrawal rules and still watched their portfolios shrink far faster than expected. The rule wasn’t broken—the assumptions behind it were simply too optimistic.

Protection Strategy 1: The Bucket Approach

One effective way to reduce sequence risk is to divide your portfolio by time horizon rather than asset type. The goal is to avoid selling growth investments during market downturns.

The first bucket holds one to three years of living expenses in cash or short-term bonds. This money is designed for stability, not growth, and ensures you can cover expenses regardless of market conditions.

The second bucket covers medium-term needs, typically years four through ten, and may include intermediate-term bonds or conservative dividend-paying stocks. The final bucket is dedicated to long-term growth and can remain heavily invested in stock index funds, giving it time to recover from inevitable market swings.

Protection Strategy 2: Dynamic Withdrawal Strategies

Fixed withdrawals sound comforting, but flexibility is often safer. Dynamic withdrawal strategies allow spending to adjust based on portfolio performance rather than following a rigid rule.

With a guardrails approach, you set upper and lower spending limits around a baseline. If your portfolio grows well, spending can increase modestly. If it declines beyond a certain threshold, spending temporarily tightens until markets recover.

Another option is the floor-and-ceiling strategy, which separates essential expenses from discretionary ones. Your basic needs are always covered, while optional spending expands or contracts based on investment performance. This preserves dignity and lifestyle without jeopardizing long-term sustainability.

Protection Strategy 3: Build a Bond Tent

As retirement approaches, gradually increasing bond exposure can help reduce volatility during the most vulnerable years. This approach, often called a “bond tent,” prioritizes stability early in retirement.

For example, an investor might hold 60% stocks at age 50, shift to a 50/50 mix by age 60, and reach 40% stocks by age 70. This doesn’t eliminate risk, but it dampens the impact of early market losses when withdrawals matter most.

Once the early retirement years pass, some retirees even increase stock exposure again to support long-term growth.

Protection Strategy 4: Flexible Retirement Timing

One of the most powerful—but overlooked—tools against sequence risk is flexibility. Retiring into a major market downturn can permanently damage a portfolio, even if the long-term outlook is strong.

If markets are significantly down near your planned retirement date, working an extra year or two can make a meaningful difference. Additional income reduces withdrawals, allows markets time to recover, and often boosts Social Security benefits.

On the flip side, exceptionally strong markets may allow earlier retirement than expected, provided the extra cushion is treated conservatively rather than as an excuse to overspend.

The Role of Social Security and Pensions

Guaranteed income sources play a crucial role in managing sequence risk. Social Security and pensions continue paying regardless of market conditions, reducing the amount you need to withdraw from volatile investments.

This is why delaying Social Security—often until age 70—can be so valuable. A higher guaranteed income floor means less pressure on your portfolio during market downturns, providing both financial and psychological stability.

Early Retirement and Sequence Risk

Those pursuing early retirement face even greater exposure to sequence risk. Longer retirement horizons mean more opportunities for poor early returns, and the absence of Social Security or pension income in the early years removes a key safety net.

Early retirees often benefit from lower initial withdrawal rates, typically in the 3% to 3.5% range, along with larger cash reserves. Flexibility, part-time income, and conservative assumptions become far more important when retirement may last four decades or more.

Putting It All Together

Protecting against sequence risk isn’t about predicting markets—it’s about planning for uncertainty. Building several years of expenses in cash, separating essential and discretionary spending, remaining flexible with withdrawals, and reviewing your plan annually can dramatically improve retirement outcomes.

Sequence of returns risk doesn’t fit neatly into simple rules of thumb, which is why it’s so often ignored. Yet understanding it can be the difference between a comfortable, confident retirement and running out of money despite doing everything “right.” Timing matters—and planning for it matters even more.