You save and plan for decades in the hopes of enjoying a secure retirement, but there’s a ­surprising risk you may never have considered. The stock market’s performance in those first few critical years right after you retire—when your portfolio assets are greatest—can upend all your planning, warns financial adviser Allan S. Roth, CPA, CFP. “Sequence of returns” risk, as it’s known, is a double whammy—you draw down assets from your portfolio after it already has been diminished by the bear market…and those assets never get a chance to recover, making you vulnerable to running out of money in advanced old age.

Bottom Line Personal asked Roth what strategies he is offering his clients who are nearing retirement or just retired to deal with sequence-of-returns risk…

Mistakes to Avoid

Some new retirees are turning to strategies that seem ultra-safe to protect their portfolios, such as holding large amounts of cash to pay bills or buying annuities. These moves have a lot of appeal in a bear market because they can lower your immediate risk. But they may not be effective when it comes to achieving long-term sustainability. Reason: They ignore the corrosive effects of higher-than-normal inflation, which we could see in the coming years. Let’s examine these two shortsighted strategies…


Mistake #1: Keeping a permanent allocation of several years’ worth of living expenses in cash. Having enough money to pay your bills in a bear market means that you can leave your portfolio untouched so it has time to recover. Plus, if you shop around, you can earn 3% to 4% on your cash in deposit accounts.

Why it’s not a good solution: It feels great to know that you have this bucket as a reserve, but, like most things in investing that feel good, it’s an imperfect approach. There is a huge opportunity cost to maintaining large amounts of cash for long periods—you are guaranteed to miss out on any capital appreciation from bull markets, and you are virtually guaranteed to underperform inflation. Sure, you can get 4% on a short-term US Treasury now, but your spending power is still being eroded by inflation. Though it’s been atypically high, consider that inflation was recently at 7% year-over-year.

Better: Ideally, you want to keep just enough cash on hand for emergencies and to be able to sleep at night. This will vary depending on your spending patterns and other sources of income.


Mistake #2: Buying a Single ­Premium Immediate Annuity (SPIA) or a ­Qualified Longevity Annuity Contract (QLAC), which allows you to defer the start of your income payouts until you reach advanced old age. These annuities, which you typically purchase from an insurance company, have emotional appeal because they offer some protection if you have a long life.

Why it’s not a good solution: There is the very real risk that inflation will erode the value of your future income stream. Example: In 25 years, the cash stream from a fixed-rate SPIA loses 52% of its purchasing power with 3% annual inflation and 85% with 8% annual inflation. So why not just get a SPIA or QLAC with inflation protection or a cost-of-living adjustment (COLA)? Insurance companies have stopped offering these products linked to actual inflation. Many offer a fixed annual increase, such as 3%, which will significantly lower your starting annual payout. While counterintuitive, these actually further increase risk if inflation turns out to be higher than forecasted.

Risk-Mitigation Strategies

The following four strategies can reduce sequence-of-returns risk and the effects of high inflation.They require more sacrifice and deferred gratification in the short term but offer greater retirement safety in the long run. Not all of them will be right for your situation, so it’s worth running the numbers, reexamining your retirement plans and evaluating the trade-offs…


Strategy #1: Retire slowly. Get part-time work that offers some satisfaction, such as working for a nonprofit with a cause you believe in. Delaying full retirement can yield multiple benefits, including earning some income while having a bit less time to spend money.


Strategy #2: Create a flexible line-item budget. Even if you have well-defined spending rules in retirement, you also need to plan how you will rein in spending if markets don’t cooperate to protect your long-term financial viability. You’ll feel more in control and less deprived if you decide ahead of time which areas of your budget to trim.

What to do: Create a spreadsheet with categories for all of your expected expenses during the year. Non-­negotiables, such as basic living expenses, medications, mortgages, etc., must be paid, regardless of what the stock market does. Divide the rest of your budget into line items that include discretionary expenses that are priorities for you…and nondiscretionary expenses that you can reduce depending upon the market’s performance. Example: Say you budget $15,000 annually for travel. If stock market returns are negative for the year, you might continue to spend $5,000 for nondiscretionary trips such as visiting the grandchildren but cut the other $10,000 worth of travel. You also need a line item called “contingencies” to cover unexpected expenses such as a new roof or expensive dental work.

Important: If the stock market is way up one year, spend the usual amount you budget for discretionary and nondiscretionary items, but resist splurging. Otherwise, you might get used to that upgraded lifestyle, and it will be even more painful if you have to cut back in subsequent years.


Strategy #3: Treat your Social Security payments as an annuity. Maximizing your Social Security benefits by delaying them until the maximum age of 70 is one of the best ways to deal with sequence-of-returns risk. Not only does your annual payout rise by about 8% for each year that you delay after full retirement age, according to the Social Security Administration, but it’s the only lifelong annuity you can get with annual inflation adjustments backed by the US government with up to a 100% survivor benefit. Note to couples: The spouse with the greater Social Security benefit should wait until age 70 unless both spouses are in poor health.

Go to to try out claiming scenarios. You’ll need a “My Social Security” account on the Social Security Administration’s website ( to get the data for the calculator.

Important: The 2023 COLA for Social Security benefits was 8.7%, the highest bump in four decades. But you should not accelerate claiming your benefits because you are worried about missing out on COLAs. When you eventually do claim Social Security, any additional adjustments will be reflected in the higher benefit you receive.


Strategy #4: Rethink the 4% rule. For decades, the gold standard of how much a retiree could withdraw from a portfolio of 50% bonds and 50% stocks each year, with a high probability of making his/her portfolio last for 30 years or more, was about 4% (including annual adjustments for inflation), or $40,000 on a $1 million portfolio. But if your portfolio takes a hit in the first few years of retirement and you encounter higher-than-normal inflation in the years ahead, 4% may not be a safe withdrawal rate, depending on how stocks and bonds perform.

New guideline: The best research I’ve seen came from analysts at Morningstar in 2021. It suggested replacing the 4% rule with an annual withdrawal rate of 3.3%, giving a portfolio split evenly between stocks and bonds a 90% chance of lasting 30 years or longer. Morningstar has since updated its work to show a 3.8% annual withdrawal rate is feasible, but I think the revised assumptions are too aggressive.

Two caveats to using the 3.3% rule: First, the future is very hard to predict, and a 90% success rate may be exaggerated when considering long ­periods of time. That’s why it’s important to employ other ways to mitigate risk rather than blindly spending at these percentages with increases each year based on inflation. Second, some ­retirees may not want this level of frugality in early retirement, especially if they hoped to splurge on vacations and other leisure activities. But I tell my clients that I’d rather have them come back to me in a few years saying they have too much money than not enough. Also, if you live lavishly in the first few years of retirement and get used to it, having to suddenly downgrade your lifestyle could be a major hardship.

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