Sequence of Returns Risk: The Bill & Jill Story

This is the most important concept in retirement planning that almost nobody is taught. If you understand nothing else about how retirement math actually works, understand this. It's the difference between a comfortable retirement and a quietly devastating one — and the timing of it has nothing to do with how good of an investor you are.

The Problem That Only Affects Retirees

While you're working, market downturns are temporary inconveniences. Your portfolio drops, you don't add money at the bottom (or, if you're disciplined, you add more), and over years it recovers. The math works out because you have time and you're not selling.

Retirement breaks both of those assumptions. Suddenly, you're not adding to your portfolio anymore — you're withdrawing from it every month to pay your bills. And those withdrawals don't pause when the market drops. The mortgage, the property taxes, the groceries, the healthcare premiums — they all keep coming due whether the S&P 500 is up 25% or down 35%.

Here's the trap: when you're forced to sell investments while they're temporarily depressed, you're permanently locking in those losses. The shares you sold to cover this month's expenses don't recover when the market does — they're gone. And the shares you have left have a smaller base from which to grow back.

This is called sequence of returns risk. The order in which your returns happen — which years come first — matters far more than the long-term average.

Meet Bill and Jill

Bill and Jill are identical retirees. Both retired with $1,000,000. Both had the same portfolio allocation, the same investments, the same withdrawal strategy: $40,000 per year (4%) increased annually for inflation. They both lived through the exact same market — same gains, same losses, same long-term average annual return of around 7%.

The only difference between them is when they retired.

Bill retired in 1996.

For the first four years of his retirement (1996–1999), the market was on a tear. The dot-com boom delivered returns of 23%, 33%, 28%, 21%. By the time the dot-com crash hit in 2000–2002, Bill's portfolio had grown so much in those early years that even with the crash and his ongoing withdrawals, his balance was still well above where he started. He weathered the storm because he had built a cushion before the storm hit.

By the time the 2008 financial crisis arrived, Bill had another decade of compounding behind him. The crash hurt, but it hurt a fraction of what it would have hurt earlier. He continued his withdrawals, the market recovered, and by 2023 — 27 years into retirement — Bill's portfolio had grown to $3.4 million. He left more to his heirs than he ever spent.

Jill retired in 2000.

Jill is unlucky. She retires four years after Bill. Year one of her retirement is the start of the dot-com crash: -9%. Year two: -12%. Year three: -22%. Three brutal years right at the start, while she's withdrawing $40,000 a year to live on.

By the end of year three, Jill's $1,000,000 has dropped below $600,000. She's barely a quarter of the way through retirement and she's lost 40% of her starting balance — partly to market losses, partly to the withdrawals she had to keep making at terrible prices. The base from which she has to recover is now dramatically smaller.

Even when the market recovered from 2003 through 2007, Jill couldn't make up the ground because she was still withdrawing the entire time. Then 2008 hit, dropping her balance further. Same withdrawals. Same compounding losses.

By 2018, just 18 years into retirement — at age 83 — Jill's portfolio was empty. She lived to 90, but the last seven years of her life were dependent on Social Security alone, supplemented by her children. Same starting money as Bill. Same investments. Same average return. Wildly different outcome.

Why "Long-Term Average" Is Misleading in Retirement

You've probably heard that the stock market averages around 10% per year over long periods. That's true — and it's also not the number that determines whether your retirement works.

In Phase 1 (accumulation), the long-term average is what matters. You're not selling, so the order doesn't matter. A series of good years and bad years that average out to 10% gives you the same end result whether the bad years come first or last.

In Phase 3 (decumulation), the order is everything. The same series of returns that produces a 10% average can leave you with $3.4 million or zero, depending on which years happen first. The only Phase 1 truth that survives Phase 3 is that you still need some growth — because inflation is going to eat your purchasing power if you don't.

(If you haven't read the framework piece yet, it's worth a quick read: Are You in Phase 2 of Retirement Without Knowing It?)

The Solution: An Income Floor

The fix for sequence of returns risk isn't to predict markets — nobody can. The fix is to structure your retirement so that bad markets don't force you to sell.

That structure has a name: the income floor. Build a layer of guaranteed monthly income — Social Security, plus a pension if you have one, plus some form of guaranteed income from a fixed indexed annuity or similar tool — that covers your essential expenses. When the market drops, your bills are still paid. You don't have to sell investments at the bottom because you don't need that money to live on. The growth portion of your portfolio gets to recover on its own timeline.

If Jill had a $4,000-per-month income floor — Social Security plus a guaranteed-income annuity — she would never have needed to sell investments during 2000-2002. Her portfolio would have ridden out the crash exactly the same way Bill's did. The same starting money would have produced the same kind of outcome, because the structure protected the assets from being touched at the worst possible moment.

What This Means for You

If you're within ten years of retirement, sequence of returns risk is the single biggest threat to your plan that almost nobody talks about. The good news: it has a known solution. The hard news: the solution requires building structure before you need it, not after the bad market arrives.

Three practical steps:

• Calculate your essential monthly expenses. Not your full lifestyle — your floor: housing, healthcare, food, utilities, basic transportation, taxes. Every dollar above that is discretionary.
• Map your guaranteed income sources. Social Security (use the SSA.gov calculator, but maximize the timing — that's a separate article worth reading). Any pension. Any current annuity income. Total it up.
• Find your gap. If your guaranteed income covers your essential expenses, you're in good structural shape and the rest is portfolio strategy. If there's a gap, that gap is what an income floor strategy is designed to close — and it's the conversation we have with most clients.