Sequence of Returns Risk in Retirement Planning (Minnesota)
Sequence of returns risk is the chance that a market downturn arrives in the first few years you are withdrawing from your portfolio rather than while you are still adding to it, and that the order those returns land in, not just the average, can change how long your money lasts. 360 Financial, a fee-based fiduciary firm with offices in Wayzata and Elk River, Minnesota, builds retirement income plans around this risk specifically, because it is one of the few things in retirement planning that is genuinely outside your control and still manageable.
A couple in Elk River came to us a few years into retirement, worried because their portfolio was worth less than when they had stopped working despite "doing everything right." They had retired in a weak market year and had been withdrawing from it ever since. Their average annual return over that stretch was actually decent. It just arrived in the wrong order.
Why the Order of Returns Matters More Than the Average
Two retirees can post the identical average return over 25 years and end up in completely different places. If the early years are strong, withdrawals come out of a growing account and the portfolio can comfortably outlast its owner. If the early years are weak, those same withdrawals come out of a shrinking account, and there is less left over to benefit when the market eventually recovers. The math is not symmetric. A portfolio that falls 20 percent needs to gain 25 percent just to get back to even, and a retiree pulling money out while that recovery is happening never fully gets there.
This is why "the market averages 7 to 8 percent a year" is true and also not especially useful for someone drawing down a nest egg. The average return over your retirement tells you much less than the path it takes, and the path is set the moment you start taking withdrawals.
Who This Actually Affects
Sequence of returns risk is sharpest in a narrow window: the five years before retirement and the first five to ten years after it, sometimes called the retirement red zone. During accumulation, a down year is almost a gift, since new contributions buy shares at a lower price. Once withdrawals begin, a down year does the opposite. It locks in losses on the shares you sell to generate income, and there are fewer shares left to recover when the market turns.
A few situations in Minnesota raise the stakes:
Retiring with a large share of savings in a single concentrated stock position, common among employees of Minnesota-headquartered companies, where one bad year is not diversified away.
Taking Social Security early and relying more heavily on portfolio withdrawals in the first retired years, which increases how much is being sold during exactly the window that matters most.
A pension-free retirement, where portfolio withdrawals are doing more of the income work than they would for someone with a steady income floor.
How We Approach It in a Minnesota Retirement Plan
There is no way to predict which years will be strong or weak, so the planning work is about reducing how much a bad sequence can hurt rather than trying to call the market. A few approaches we use with clients, adjusted to the household:
Approach | What it does | Trade-off to weigh |
Cash and short-term reserve | Covers a year or two of spending without selling depressed assets | Lower long-term growth on that slice |
Bucket strategy | Separates near-term, mid-term and long-term money by time horizon | Requires discipline to rebalance between buckets |
Flexible withdrawal rate | Trims spending modestly in down years instead of a fixed amount every year | Asks for some spending flexibility in bad years |
Fixed income layer | Covers essential expenses from Social Security, pensions or contracted annuity payments | Reduces portfolio liquidity for that allocated amount |
Most plans we build use more than one of these together. A retiree with two to three years of spending set aside outside the market, for instance, is rarely forced to sell equities during a downturn just to pay the bills, which is most of what sequence of returns risk is really about.
Stress-Testing Before Retirement, Not After
The best time to address sequence of returns risk is before you retire, while there is still flexibility to adjust the retirement date, the savings rate or the asset mix. We run Monte Carlo and historical sequence testing as part of our retirement planning process specifically to show what happens if the first few retired years turn out to be the market's worst, not just its average. Seeing that scenario in advance tends to change the plan in useful ways: a slightly later retirement date, a larger cash reserve, or simply the confidence that the plan was built to survive a bad stretch, not just a typical one.
Our LifeWealth Process looks at Family, Occupation, Recreation and Money together, which matters here because the right answer is rarely "take less risk across the board." It is usually about matching the timing of withdrawals to the shape of the portfolio, not reducing the portfolio itself.
Frequently Asked Questions
What is sequence of returns risk in simple terms? It is the risk that the order your investment returns arrive in, not just their average, determines how long your retirement savings last. Losses early in retirement do more damage than the same losses later on.
Is sequence of returns risk only a concern for retirees? It matters most once you start withdrawing. During the working years, a down market has little lasting effect and can even help, since contributions buy in at lower prices.
How much cash should I keep to manage sequence risk? There is no single number, and we work out a figure based on your spending needs and other income sources, but one to three years of planned withdrawals held outside the market is a common starting point for Minnesota retirees we work with.
Can an annuity solve sequence of returns risk? An annuity can cover essential expenses regardless of market performance, which reduces how much a bad sequence can affect your lifestyle, but it is one tool among several and is not the right fit for every household.
Does a 4 percent withdrawal rate help with this? A fixed withdrawal rate helps, but a flexible approach that adjusts spending modestly in down years tends to hold up better across a wider range of market sequences, according to the research we rely on in planning.
When You Are Ready, We Are Here
If you want a calm conversation about sequence of returns risk and how your own retirement plan would hold up in a weak early market, you can book a free 15-minute introduction with a fiduciary advisor at schedule.360financial.net.
You can also call the Wayzata office at 952-542-8900, the Elk River office at 763-241-0841, or reach the team through the contact page.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Past performance referenced is historical and does not indicate future results. All indices are unmanaged and cannot be invested into directly.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
This article was created for informational purposes only. LPL Financial makes no representation as to its completeness or accuracy.
