Sequence of Returns Risk: Why Market Volatility Near Retirement Hits Harder Than You Think

Educational article, not personal advice. See full disclosures at the end of this article.

Markets moved sharply on July 23, 2026. The S&P 500 closed at 7,408.97, down 1.20% on the day. The Nasdaq fell 2.15%, closing at 25,137.69, as tech and rate-sensitive names bore the brunt of the selling. The CBOE VIX, the market's implied volatility gauge, rose 12.38% to 18.70, well off its 52-week high of 35.30 but meaningfully elevated. (Source: Perplexity Finance, as of July 23, 2026.)

Days like this happen. If you are 45 or 50, a down day like this barely registers in your long-term plan: you keep contributing, stay the course, and let time do its work. But if you are 60, 62, or 65, the calculus changes, not because markets behave differently, but because you are standing in a different place in your financial life.

Sequence of Returns Risk in Retirement

Sequence of returns risk is the danger that poor market returns early in retirement, combined with ongoing withdrawals, can permanently deplete a portfolio, even if the average returns over the full retirement period would have been perfectly sufficient. It is not the average return alone that determines how long your money lasts. It is the order in which gains and losses arrive relative to when you are withdrawing.

Most conversations about market volatility focus on long-term average returns, and for someone in their 30s or 40s, that framing is largely correct. Markets go up over time. Downturns are temporary. Stay invested.

But averages obscure something critical for pre-retirees and recent retirees: the order in which returns arrive matters enormously once you are withdrawing from a portfolio rather than adding to it.

Consider two investors who both earn an identical 20-year average annual return on their retirement portfolios. The only difference is the sequence of returns: one experiences the bad years early in retirement, the other experiences them late. The investor who faces the downturn early, while making large withdrawals from a peak-value portfolio, may run out of money well before the investor who faces the same downturn later, even though their average returns are identical on paper.

Why? Because when you sell shares during a downturn to fund living expenses, those shares are gone. They do not participate in the recovery. The hole in your portfolio grows larger every month you withdraw at depressed prices. The math compounds against you in a way it simply does not during the accumulation years.

Sequence of Returns Risk: A Concrete Example

Hypothetical example for illustration only. Results not guaranteed.

Numbers make sequence of returns risk concrete. Imagine two retirees, Retiree A and Retiree B, who each begin retirement with an identical $1,000,000 portfolio, withdraw $50,000 (5%) annually, and earn the same 6% average annual return over a 20-year retirement. The only difference between them is the sequence of returns: Retiree A experiences a 25% market decline in year one of retirement, then average returns for the remaining 19 years. Retiree B experiences average returns for the first nine years, then the same 25% decline in year ten, followed by average returns again for the last ten years.

Both retirees earned the identical 6% average annual return over 20 years. But because Retiree A's decline happened in year one, while the portfolio was near its peak size and withdrawals were already underway, the loss compounded against a smaller remaining balance for the rest of retirement. Retiree B's portfolio had nine years to grow before absorbing the same decline, leaving substantially more capital in place to recover and continue compounding. This is the core mechanic behind sequence of returns risk: the average return does not determine the outcome nearly as much as the order in which returns arrive relative to your withdrawals.

Why the Two-to-Five Year Window Is the Most Vulnerable

The period from roughly five years before retirement through the first two to three years of retirement is, in many ways, the highest-stakes window in a person's financial life. Here is why.

During your peak earning years, a market decline is painful on paper but manageable in practice. Your paycheck keeps arriving. You may even buy more shares at lower prices through your 401(k). Time works in your favor.

Enter the transition zone: two to five years from your planned retirement date. Your portfolio is likely at or near its peak size. You are no longer decades away from drawing on it. You may have already reduced your risk exposure somewhat, but probably not enough to be fully insulated from a significant drawdown.

Now consider what happens if you retire into a down market. You begin withdrawing from a portfolio that has already fallen 20% or 30%. Every dollar you take out to pay your mortgage, your groceries, your healthcare, is a dollar sold at a loss. And unlike a mid-career investor, you cannot simply wait. Your income needs are real and ongoing.

The Nasdaq's steeper decline of 2.15% on July 23, 2026, relative to the Dow's 0.97% drop on the same day, illustrates how concentrated portfolios in growth and tech names can experience sharper drawdowns precisely when pre-retirees may be most exposed. A 52-week VIX range of 13.38 to 35.30 reflects how quickly the volatility environment can shift. (Source: Perplexity Finance, as of July 23, 2026.)

The Futility of Market Timing (and Why It Is Even Harder Near Retirement)

The instinct when markets fall is to do something: move to cash, reduce equity exposure, wait for things to calm down. It feels prudent. It is, in fact, one of the most reliable ways to damage long-term outcomes.

Based on JP Morgan data covering S&P 500 total returns from January 2003 through December 2022, missing just the ten best trading days during that nearly 20-year period would have dramatically reduced an investor's cumulative return. Seven of those ten best days occurred during bear markets. The recovery days are clustered around the worst days, and no one rings a bell when they arrive.

For a pre-retiree or recent retiree, the cost of mistiming is even higher. Moving to cash during a downturn means locking in losses and then facing the reinvestment problem: when do you get back in? Most investors who sell during a downturn stay in cash far longer than they intended, missing the early phase of the recovery that generates much of the rebound return.

The answer is not reckless optimism. It is a plan that removes the need to make reactive decisions under pressure, because the income you need is already positioned in stable assets.

Why Diversification Still Matters, and What It Cannot Do Alone

Historical data from Vanguard shows that a 60/40 portfolio (60% stocks, 40% bonds) reduced the 2008 drawdown by nearly half compared to an all-stock portfolio, while still delivering solid long-term returns. Diversification across asset classes is a genuine risk-management tool, not just a platitude.

According to Morningstar's 2022 research, low-cost funds outperformed high-cost funds in every asset class over a 10-year period, with fees being one of the strongest predictors of future performance. Cost discipline in a diversified portfolio compounds its benefit over time.

For the equity sleeve of a portfolio, that cost discipline is best expressed through broad-market, low-cost index ETFs, the indexing approach that firms like Vanguard pioneered decades ago. This is a philosophy, not a specific product recommendation: rather than trying to select individual winners, a broad-market index ETF is designed to capture the return of an entire market or asset class at a very low ongoing cost. Paired with the Morningstar cost research above, the logic compounds over time. Over a 20 to 30 year retirement, every basis point saved in fees is a basis point that stays invested and continues compounding, and broad diversification helps reduce the risk that any single holding or sector drags down the whole portfolio. Broad-market index ETFs still carry full equity market risk and can decline sharply in a downturn like any other equity holding, but as a foundation, they are one of the most cost-efficient ways to combine diversification with the compounding runway a multi-decade retirement requires. Because index fund selection, tax-loss harvesting, and account placement all interact, our CFP® professionals and CPAs coordinate these decisions together rather than treating investment selection and tax planning as separate conversations, so the cost savings from a disciplined indexing approach are not quietly given back through avoidable tax drag or fund overlap.

But diversification alone does not solve the sequence of returns problem. A 60/40 portfolio can still fall 20% to 25% in a significant market event. If you are withdrawing 4% to 5% annually from a portfolio that falls 20%, you are drawing down a meaningfully larger share of what remains, and the recovery math becomes harder. Diversification is a necessary foundation; it needs to be combined with how and from where you withdraw.

How to Mitigate Sequence of Returns Risk: A Coordinated Plan in Action

The strategies below are not theoretical. They are the practical levers that a coordinated retirement plan uses to reduce sequence of returns exposure and give a portfolio the room it needs to recover without being drawn down under duress.

1. The Cash Reserve: Your First Line of Defense

The simplest and most effective protection against being forced to sell equities in a down market is having enough liquid, low-risk assets to fund one to three years of living expenses without touching your equity portfolio at all. Cash, short-term Treasuries, or money market funds set aside specifically for near-term income needs act as a buffer between you and market volatility.

When markets fall, you draw from the buffer. When markets recover, you replenish it from your equity portfolio before the next down cycle. This breaks the dangerous feedback loop where withdrawals accelerate losses. Your Social Security claiming age also affects how much you need to withdraw from your portfolio in down years; see our claiming strategy guide for the coordination.

2. The Bucket Strategy: Building a Portfolio That Can Wait

A bucket strategy extends the cash reserve concept across the full retirement timeline. It divides a portfolio into segments:

• Short-term bucket (years 1-2): Cash and very short-duration bonds. Funds near-term living expenses without any equity exposure.
• Medium-term bucket (years 3-7): Bonds, balanced funds, and lower-volatility assets, often structured as a bond ladder so that a portion matures each year. Designed to be sold or matured and used to refill the short-term bucket over time.
• Long-term bucket (years 8+): Equities, including both domestic and international stocks. Given the time horizon, this bucket can survive a multi-year downturn without being touched.

The critical discipline is leaving the long-term bucket alone during downturns. The worst outcomes occur when retirees break that discipline and liquidate equities at the bottom to fund immediate needs, needs that should have been funded by the short-term bucket in the first place.

The Bond Ladder Strategy: A Concrete Way to Build the Medium-Term Bucket

The medium-term bucket is often described in the abstract, but in practice a bond ladder strategy is one of the most concrete ways to build it. A bond ladder staggers bond maturities so that a rung of the ladder matures every year, returning principal on a schedule that lines up with your income needs. As each rung matures, you either spend the returning principal directly or reinvest it, without ever being forced to sell a bond, or an equity, at a loss to generate cash.

Because each rung's principal and interest arrive on a set schedule regardless of what equity markets are doing that year, a bond ladder is designed to supply income precisely when equity market conditions might otherwise force an untimely sale, which is the heart of managing sequence of returns risk in retirement.

A bond ladder for retirement income can be built with individual bonds or, increasingly, with funds designed specifically for this purpose. The table below illustrates the concept using a simple five-year ladder.

A bond ladder strategy may help reduce the risk of being forced to sell assets during a downturn, but it does not eliminate market or credit risk entirely. Bond values can still fluctuate before maturity, and a ladder is only as strong as the credit quality of the bonds inside it.

A bond ladder's income is also taxed differently depending on the type of bond, whether it sits in a taxable account, an IRA, or a Roth, and how its maturities line up with your withdrawal sequencing and any Roth conversion plans for that year. Building the ladder is one part of the work; coordinating its maturity schedule with your broader tax picture is another. This is the depth of fixed income planning our CFP® professionals and CPAs work through together, so the income designed to protect you from sequence of returns risk in retirement also fits cleanly into your annual tax plan.

Target-Maturity ETFs: A Modern Way to Build a Bond Ladder

Building and managing a ladder of individual bonds has traditionally required buying, tracking, and eventually reinvesting or spending each bond as it matures, a task that is manageable but operationally heavy for many households. A target maturity bond ETF, often just called a target maturity ETF, is a relatively recent innovation designed to address that problem. Each target maturity ETF holds a diversified portfolio of investment-grade corporate bonds that all mature in a specific target year, combining the maturity discipline of an individual bond with the diversification and liquidity of an ETF wrapper.

As a target maturity ETF approaches its stated year, its duration declines, which is designed to reduce interest-rate sensitivity at roughly the point the money is likely to be needed. In practice, this means an investor, or an advisor building a plan on their behalf, can construct a bond ladder for retirement income by purchasing several target maturity ETFs, each targeting a different year, rather than sourcing and monitoring individual bonds one by one.

This is a relatively new development in the ETF marketplace. In March 2026, Vanguard launched a suite of ten BondBuilder Target Maturity Corporate Bond ETFs, spanning target maturity years from 2027 through 2036, designed to help investors and advisors build laddered fixed income exposure inside an ETF wrapper. Morningstar published an analysis of this category in June 2026, examining how target maturity ETF suites function as a way to implement a bond ladder at a lower cost. We reference both sources for educational purposes only, not as a recommendation of any specific fund.

The benefit for a retiree building a medium-term bucket is meaningful: a target maturity bond ETF is designed to offer the cash-flow planning precision of a bond ladder without the operational burden of sourcing, tracking, and reinvesting individual bonds one at a time. The limitation matters just as much. These are corporate bond ETFs, which means they concentrate credit risk in a single sector of the bond market. They generally work best as a complement to Treasuries or other high-quality holdings within a medium-term bucket, not as a standalone core bond allocation, and like any bond investment, they can lose value before maturity and are not guaranteed against loss.

3. Withdrawal Sequencing: Which Account You Pull From Matters

The question of from which account you withdraw each year is as important as how much you withdraw. Taxable brokerage accounts, traditional IRAs, and Roth IRAs are taxed very differently, and the sequence in which you draw them down has meaningful lifetime tax implications.

A common starting framework draws from taxable brokerage accounts first (taking advantage of lower capital gains rates), then from traditional IRAs and 401(k)s to manage bracket exposure, and preserves Roth accounts for last, allowing tax-free growth to compound as long as possible. But the right sequence for any individual depends on their income sources, bracket situation, estate planning goals, and Medicare premium exposure. This is where integrated financial planning and tax work need to be done together, not in separate conversations.

4. Roth Conversion Timing: Turning a Down Market Into an Opportunity

A significant market decline can actually create a Roth conversion opportunity for pre-retirees. When your traditional IRA balance is down 20%, converting a given dollar amount moves fewer shares of value into the Roth at the same tax cost. The recovery then happens inside the Roth, where it grows and is eventually withdrawn tax-free, rather than inside the traditional IRA, where it would eventually be subject to Required Minimum Distributions and ordinary income tax.

This strategy only works, however, if your broader plan is solid enough that you are not simultaneously forced to liquidate other assets to fund living expenses. Opportunistic Roth conversion during a downturn requires cash reserves and income positioning to already be in place. Our tax planning team works alongside your investment management to identify these windows and size conversions carefully, staying below IRMAA thresholds and within optimal bracket ranges.

5. Rebalancing Discipline During Downturns

A market decline that hits equities harder than bonds will cause your portfolio's allocation to drift below its equity target. Disciplined rebalancing, buying equities and trimming bonds to restore your target allocation, is counterintuitive during a downturn but is one of the clearest ways to buy low systematically. Done in a tax-aware way, it can also create tax-loss harvesting opportunities that improve after-tax returns. This is the mechanical opposite of panic selling, and it requires a plan and a steady hand to execute it.

The Coordinated Difference

None of these strategies works in isolation. A cash reserve without a withdrawal sequencing strategy may deplete the wrong accounts. A Roth conversion without the full tax picture may trigger an IRMAA surcharge that costs thousands in Medicare premiums two years later. A bucket strategy without an investment management framework for rebalancing may fail to refill the buckets efficiently.

This is why we built United Financial Planning Group the way we did: CFP® professionals, CPAs, and Enrolled Agents working from the same complete picture of your financial life. No handoff between your financial planner and your accountant. No investment decisions made without the tax implications already accounted for. Our team holds weekly strategy sessions and reviews each client's full situation before any recommendation is made.

We are fee-only fiduciaries. No commissions, ever. Our only interest is in the plan that actually serves you.

What This Means for You, Right Now

If you are within five years of retirement and you watched the markets move on July 23, 2026, with a knot in your stomach, that feeling is useful information. It is telling you something about whether your current plan is built for the life transition you are approaching.

The right time to put sequence of returns protection in place is not after a significant downturn has already begun. It is before, when you have the flexibility to position your cash reserves, adjust your withdrawal sequencing, and identify Roth conversion opportunities from a position of strength rather than reaction.

If you are already in retirement and navigating volatility with an existing plan, the same applies: the plan's value is most visible precisely when markets are unsettled and the alternative, reactive decisions made under pressure, is most costly.

We work with pre-retirees and retirees throughout Long Island, Manhattan, and across New York, as well as clients nationwide who value the integrated approach. If you would like to talk through how your current plan handles a down market, we invite you to reach out. No pressure, no pitch, just a clear-eyed conversation about where you stand.

Schedule a complimentary consultation with United Financial Planning Group. Learn more about our approach to retirement planning, financial planning, investment management, and tax planning.

Disclosures

This article is provided for general educational and informational purposes only and does not constitute personalized financial, tax, investment, or legal advice. Market data cited (S&P 500, Dow Jones Industrial Average, Nasdaq Composite, CBOE VIX) is sourced from Perplexity Finance as of July 23, 2026, and reflects closing or intraday values as of that date; past market performance is not indicative of future results. The JP Morgan study referenced covers S&P 500 Index total returns from January 2003 through December 2022. The Vanguard 60/40 drawdown comparison reflects the 2008 market event and is used for illustrative purposes only. The Morningstar low-cost fund research referenced is from Morningstar's 2022 fund cost study. This article also references Vanguard's BondBuilder Target Maturity Corporate Bond ETF suite, launched in March 2026, and a June 2026 Morningstar analysis of target maturity bond ETF strategies; both are cited for general educational purposes only and are not recommendations to buy or sell any specific security, and references to broad-market or target-maturity index ETFs throughout this article describe general investment strategies rather than product recommendations. All investing involves risk, including possible loss of principal, and all of these third-party data points are historical and are not a guarantee of future performance. The bond ladder table and the sequence of returns risk example presented in this article are hypothetical illustrations using assumed figures for educational purposes only; they do not represent actual investment results, are not projections, and are not a guarantee of future performance. Sequence of returns risk, bucket strategy concepts, bond ladder strategies, Roth conversion analysis, and withdrawal sequencing are general educational frameworks; their applicability and benefit depend on individual circumstances including income, account balances, tax situation, state of residence, and retirement timeline. Results vary by individual. Please consult a qualified financial advisor and tax professional regarding your specific situation before making any decisions.