What If the Market Drops Right After You Retire? How Sequence of Returns Risk Works

Withdrawals during a market decline can do lasting damage early in retirement, because each dollar sold at a lower price leaves fewer shares to recover. This is sequence of returns risk, and Morningstar’s research finds the first five years carry most of it. This guide covers how it works and what to decide in advance. It does not predict markets.

Headlines about market levels can make the question feel urgent. Nothing below depends on where markets are today or where they are headed. It is a look at the mechanics, so you can see what your own plan would need to handle.

What is sequence of returns risk?

Sequence of returns risk is the danger that poor investment returns early in retirement, while you are also withdrawing money, reduce a portfolio more than the same returns would later on. Two retirees can earn the same average return over 30 years and finish in different places, because of the order the good and bad years arrived.

While you are working and adding money, a down year is uncomfortable but time is on your side, and new contributions buy shares at lower prices. In retirement the flow reverses. Money leaves the account every year, so a decline does two things at once: it lowers the balance, and it forces you to sell more shares to raise the same income. Those shares are gone when prices recover.

Our glossary entry on sequence of returns risk and our short answer on sequence risk cover the definition. This guide goes further into the research, the tax interactions and the decisions a household can make ahead of time.

Why does a market drop hurt more right after you retire?

A decline often does more harm early because the portfolio is usually at its largest and withdrawals have only just begun. The balance shrinks while cash also leaves it, so fewer shares remain when prices recover. Later in retirement, a similar decline meets a smaller portfolio and a shorter remaining horizon.

Morningstar shows the effect with a three-year illustration. Take the same starting balance, the same dollar withdrawal each year, and the same three annual returns: two gains and one loss. When the loss comes in year three, the portfolio ends higher than when the loss comes in year one. In Morningstar’s example the difference is roughly 5% of the ending balance (our rounding of its published figures). Nothing changed except the order.

Stretch that over a retirement that may run 30 years or longer, and the early years carry more weight than a simple average suggests. That is why a single average return can describe two very different retirements.

What does the research say about the first five years?

In Morningstar’s modeling of an all-stock portfolio, nearly 70% of the simulated cases that ran out of money had investment losses by the end of year five. These are simulation results under stated assumptions, not a forecast, but they show why planners look hardest at the first few years of withdrawals.

Here is what Morningstar reported, with the date of each source:

Morningstar chose an all-stock portfolio on purpose, because it is the scenario most exposed to this risk. It notes that few retirees start drawing income from an all-equity portfolio, so your own exposure may be smaller. You can read the studies at Morningstar: The Biggest Risk for New Retirees and Morningstar: How to Avoid Outliving Your Retirement Savings? It’s All in the Sequence.

How often has a bad early sequence actually happened?

Morningstar notes that US stocks have had a seriously negative sequence of returns only a few times in the past 92 years: 1929 to 1932, 1939 to 1941, 1973 to 1974 and 2000 to 2002. Each involved losses lasting at least two consecutive years. History describes what occurred. It does not say whether or when another will.

A few episodes in 92 years can sound reassuring or alarming, depending on the reader. Planners tend to treat it differently: the retirement date is set in advance, the market’s path afterward is unknown, and the cost of a weak start falls on the household that happened to retire into it. That is why the question is whether a plan could handle a rough start, not whether one is expected.

Does sequence risk ever go away?

It fades but does not disappear. In Morningstar’s simulations, retirees who made it through the first five years with investment gains had about a 4% chance of later running out of money, assuming fixed inflation-adjusted withdrawals. Losses in later years can still do damage, depending on their depth and how long they last.

Two points are easy to miss. First, the figures assume the retiree kept the same inflation-adjusted withdrawals no matter what. A household that adjusts spending, uses other income or draws from different accounts is not following that exact rule. Second, “fades” is a statistical statement about many simulated retirements. It says nothing about any single household’s outcome.

What can a household decide before retiring?

Households generally work with a handful of levers: how flexible spending can be, how many years of withdrawals sit outside stocks, how much income comes from sources that do not move with markets, and which account pays for each year. Each lever has a cost, and none of them removes the risk.

The account map is the lever that is easiest to overlook. A cash reserve or a bigger Social Security benefit does not by itself say where the next dollar comes from. Our guide to withdrawal sequencing covers the order of accounts, and our guide to retirement income architecture shows how the pieces fit together.

How do taxes and required distributions change the picture?

Taxes affect which account is tapped in a down year, and required distributions put a floor under withdrawals. The IRS bases each year’s required minimum distribution on the prior December 31 balance, so a decline lowers the next year’s requirement but does not excuse the current one.

According to the IRS, the required amount for any year is the account balance at the end of the preceding calendar year divided by a distribution period from its Uniform Lifetime Table, and withdrawals are generally included in taxable income, except for any part that was taxed before or can be received tax-free. So the choice of which account funds a withdrawal in a weak year is also a choice about taxable income.

Some households ask whether a lower balance changes the math on a Roth conversion. The IRS explains that the amount converted, to the extent it would otherwise have been taxable, is included in income for the year of the conversion. Whether a conversion fits is a modeling question for a CPA, not a rule of thumb, and a decline may or may not reverse. Our guides to the first ten years tax window and RMD exposure explain the timing in more depth.

What might a hypothetical couple weigh?

Imagine a couple, both 60, where one spouse is a senior executive retiring at year end. They hold a pre-tax 401(k), a taxable brokerage account, a Roth IRA, vested stock awards and a deferred compensation payout schedule. They want to know how their plan would handle a weak start.

Here is how they might work through it:

1. Sort spending into must-pay and flexible. Housing, insurance and health coverage are hard to cut. Travel and gifts are easier to adjust.
2. Decide when each spouse might claim Social Security. That sets how many years savings carry the household alone.
3. Decide how many years of withdrawals sit in cash or short-term holdings. Then decide who refills that reserve, and from which account, in what kind of year.
4. Map which accounts pay for years one, two and three if markets fall, and if they do not. Include how deferred compensation payouts show up in taxable income.
5. Write down in advance what would trigger a spending change. Deciding before a decline is easier than deciding during one.
6. Review the map with their CPA before retirement, and again after any major market or tax change.

Another household might land somewhere different, because of its spending, its accounts or its comfort with change. This example is hypothetical, for illustration only, and is not a projection or a recommendation for any household. Results are not guaranteed.

What mistakes do people make with sequence risk?

• Treating the average return as the whole story. Order matters once withdrawals begin.
• Planning around one expected path. A plan tested only against a smooth start has not been tested.
• Counting on spending cuts the budget cannot absorb. Flexibility on paper is not flexibility in practice.
• Holding a cash reserve with no refill plan. A reserve that is spent down and never rebuilt is a delay, not a plan.
• Choosing the source of withdrawals in the moment. Picking accounts under stress can add tax cost.
• Reacting to headlines instead of a written plan. Decisions made after a decline tend to be harder than those made before.
• Assuming the risk ends after one good year. Morningstar found the risk fell, not that it vanished.

What are the limits and risks?

• The numbers are modeled, not predicted. Morningstar’s figures come from simulations with stated assumptions, and actual markets may differ from any model.
• The headline scenario is the most exposed one. The nearly 70% finding is for an all-stock portfolio with fixed inflation-adjusted withdrawals, which may not resemble your plan.
• Every lever has a cost. Cash and bonds can lag or lose value, spending cuts reduce lifestyle, and delaying Social Security can mean spending more savings first.
• History is not a forecast. Past rough starts do not indicate whether another will occur.
• Taxes and rules change. Required distribution rules, brackets and benefit rules are set by law and can change.
• This is education, not advice. Retirement Roadmap Experts is not affiliated with Morningstar, and Morningstar has not reviewed or endorsed this article.

Because taxes sit inside nearly every withdrawal decision, coordinate with your own CPA before you set a withdrawal order or a cash reserve.

Source and as-of date

The mechanics above reflect these sources as read on October 23, 2026:

• Morningstar: The Biggest Risk for New Retirees, published December 9, 2025, for the three-year illustration, the 92-year history, the failure findings, the quintile result and the mitigation approaches. Charts are dated September 30, 2025, and November 30, 2025.
• Morningstar: How to Avoid Outliving Your Retirement Savings? It’s All in the Sequence, published March 6, 2025, for the year-15 finding. Data as of September 30, 2024.
• IRS Retirement topics: Required minimum distributions, for the RMD formula and the taxability of withdrawals.
• IRS Publication 590-A, for the treatment of Roth conversion amounts.
• Social Security Administration: Delayed Retirement Credits, for the increase for delaying benefits.

Rules, assumptions and research change, and Morningstar updates its retirement income work each year, so confirm current figures with the sources above, your plan administrator and your tax professional before acting.

What should you do next?

A published study can show what one set of assumptions produced. It cannot show what your retirement date, accounts, spending and tax picture would produce if the first few years were rough. That is the question inside our Early Retirement Feasibility work, which tests a target date against spending, taxes and market risk together. Our guide to the safe withdrawal rate covers the percentage side of the same question.

A good first step is the free Risk Analysis, which takes a few minutes and gives you something concrete to bring to a conversation. When you are ready to look at your own plan, schedule a free 30-minute conversation with Robert Boeck, with no products and no pitch, before you retire, not after a decline.