Personal Finance
Sequence of returns risk can hurt retiree portfolios. How to plan
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Stock market dips can create a big portfolio risk during your earlier retirement years — and many investors don’t prepare, financial experts say.
The issue, known as “sequence of returns risk,” refers to how the timing of withdrawals paired with stock market losses can impact how long your retirement saving lasts.
Your first five years of retirement are the “danger zone” for tapping accounts during a downturn, according to Amy Arnott, a portfolio strategist with Morningstar Research Services.
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If you take assets from accounts when the value is falling, “there’s less money left in the portfolio to benefit from an eventual rebound in the market,” she said.
Moreover, sequence risk can increase your chances of outliving retirement savings, Arnott said.
For example, let’s say your portfolio dropped by at least 15% during your first year of retirement and you also withdrew 3.3% of the balance.
That combination would increase your odds of depleting the portfolio within 30 years by six times compared to someone with a first-year positive return, according to a 2022 report from Morningstar. (This research assumed future yearly withdrawals were fixed at the same share of the portfolio.)
Negative returns are more harmful early in retirement than later, according to a 2024 report from Fidelity Investments. That’s because retirees miss more years of potential compound growth.
“It’s very difficult to overcome those losses in early years,” said David Peterson, head of advanced wealth solutions at Fidelity.
By comparison, early years of positive returns in retirement have “the advantage of the markets working in your favor,” he said.
Keep a ‘balanced asset allocation’
As you approach retirement, a “balanced asset allocation” is one of the best things investors can do to reduce sequence risk during early retirement years, Arnott said.
For example, there’s a lower sequence risk if your portfolio is 60% stocks and 40% bonds compared to heavier stock allocations, she said.
With the “proper asset allocation,” negative returns might not be as extreme for your portfolio as the stock market losses, Peterson said. Of course, the right mix ultimately depends on your risk tolerance and goals.
Adopt the ‘bucket approach’
You can also shield your portfolio from stock market losses with a retirement strategy known as the “bucket approach,” Arnott said.
Typically, you’ll keep one to two years of living expenses in cash, which would be accessible during market dips, she said.
The next five years of spending could be in short- to intermediate-term bonds or bond funds. Beyond that, the third bucket focuses on growth with stocks, Arnott said.
“It does take some maintenance from year to year,” but it could provide “peace of mind” while reducing sequence of returns risk, she said.
A sign for the U.S. Social Security Administration is seen outside its headquarters in Woodlawn, Md., on Thursday, March 20, 2025.
Tom Williams | Cq-roll Call, Inc. | Getty Images
A federal judge has temporarily blocked the Trump administration’s Department of Government Efficiency from accessing personal data at the Social Security Administration. In comments after the ruling, the agency’s acting commissioner Lee Dudek told Bloomberg that it may interfere with the SSA’s services.
The Social Security Administration sends millions of benefit checks per month to retirement and disability program beneficiaries, both through Social Security and Supplemental Security Income.
Judge Ellen Lipton Hollander on Thursday barred Social Security Administration employees including Dudek from granting the DOGE team access to information that can be used to identify individuals. DOGE is not an official government department, while its leader, Tesla CEO Elon Musk is considered a special government employee.
The judge also ordered DOGE team members to delete all non-anonymized personally identifiable information they have accessed “directly or indirectly” since Jan. 20.
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Following the ruling, Dudek said the court order is so broad that it could apply to any Social Security employee, Bloomberg reported on Thursday.
“My anti-fraud team would be DOGE affiliates. My IT staff would be DOGE affiliates,” Dudek told Bloomberg. “As it stands, I will follow it exactly and terminate access by all SSA employees to our IT systems.”
Dudek also said he would ask the judge to immediately clarify the order, the news outlet reported.
“We have received the court order and we will comply,” a Social Security spokesperson said in an email statement to CNBC on Friday. The agency did not respond directly to questions from CNBC on the Bloomberg report, or to make Dudek available for comment.
Advocacy groups slam Social Security leadership
Dudek’s comments, and the implications that the court actions could interfere with the timely delivery of benefits, prompted a wave of responses from advocacy groups.
“For almost 90 years, Social Security has never missed a paycheck — but 60 days into this administration, Social Security is now on the brink,” Lee Saunders, president of the American Federation of State, County and Municipal Employees, said in a statement in response to Dudek’s comments. Hollander’s ruling was in a suit that a coalition of unions and retirees including AFSCME, a trade union, brought against the Social Security Administration.
Dudek “has proven again that he is in way over his head,” said Saunders, noting that under Dudek’s leadership the agency has compromised Americans’ security, shut down certain agency services and planned layoffs.
In a separate statement, Nancy Altman, president of Social Security Works, said Dudek’s leadership has been the “darkest in Social Security’s nearly 90 year history.”
“He has sown chaos and destruction,” Altman said.
In a memo sent to Social Security staff members on Tuesday that was obtained by NBC News, Dudek apologized for having made mistakes and promised to learn from them.
Dudek assumed the role of acting commissioner in February when then acting commissioner Michelle King stepped down due to DOGE privacy concerns. Dudek, a long-time Social Security employee, reportedly publicly disclosed he had been placed on administrative leave for cooperating with DOGE.
President Donald Trump has nominated Frank Bisignano, CEO of payments technology company Fiserv, to serve as commissioner. Bisignano’s Senate confirmation hearing is scheduled for Tuesday.
Democrats, Republicans at odds over Social Security
Tensions surrounding changes at the Social Security Administration have prompted a war of words between Democrats and Republicans in Congress.
House Ways and Means Committee ranking member Richard Neal, D-Mass., on March 19 put out a statement that called the current situation at the Social Security Administration a “five-alarm fire.” New changes that may limit customer service and restrict benefit access are “not just burdensome for our nation’s seniors and people with disabilities — they are back-door benefit cuts,” Neal wrote.
Meanwhile, House Ways and Means Committee Chairman Jason Smith, R-Mo., in a March 12 statement said Democrats are “scaremongering to score political points,” while “the facts are not on their side.”
“President Trump did not touch Social Security benefits during his first term,” Smith said. “House Republicans and President Trump remain committed to protecting and preserving the retirement benefits seniors count on.”
Traders work on the floor of the New York Stock Exchange (NYSE) in New York City.
Spencer Platt | Getty Images
Stock market corrections are common
First, there is some consolation for investors. Though they may feel painful, stock market corrections are fairly common.
There have been 27 market corrections since November 1974, including last week’s market move, according to Mark Riepe, head of the Schwab Center for Financial Research. That amounts to roughly one every two years or so, on average.
Most of them haven’t cascaded into something more sinister. Just six of those corrections became “bear markets” (in 1980, 1987, 2000, 2007, 2020 and 2022), according to Riepe. A bear market is a downturn of 20% or more.
Pullbacks can be ‘an incredible opportunity’
Investors often engage in catastrophic thinking when there’s a market pullback, believing the market may never recover and that they’ll lose all their hard-earned money, said Brad Klontz, a certified financial planner and behavioral finance expert.
In reality, pullbacks are a less-risky time to invest, relative to when stocks are hitting all-time highs and feel more “exciting,” said Klontz, managing principal of YMW Advisors in Boulder, Colorado, and a member of CNBC’s Advisor Council.
Investors are also buying stocks at a discount, known as “buying the dip.”
“It’s an incredible opportunity for you to be putting more money in,” Klontz said.
This is especially the case for young investors, who have decades for stock prices to recover and grow, Klontz said.
Investors in workplace plans like 401(k) plans unconsciously take advantage of stock selloffs via dollar-cost averaging. A piece of their paycheck goes into the market every pay cycle, regardless of what’s happening in the market, Klontz said.
Be mindful of stock/bond allocations
However, investors should think carefully before going on a stock-buying spree, said Christine Benz, director of personal finance and retirement planning for Morningstar.
They should generally avoid diverging from their stock/bond allocations calibrated in a well-laid financial plan, she said.
Of course, certain investors with cash on the sidelines may be able to take advantage of selloffs by investing in undervalued stocks, Benz said. U.S. large-cap stocks, for example, were selling at a roughly 5% discount relative to their fair market value as of Wednesday, according to Morningstar.
“I would let the asset-allocation target lead the way in determining whether that’s an appropriate strategy,” Benz said.
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