Imagine two brothers. Both have a million dollars. Both retire with identical portfolios. Both spend the same amount every year. Both live the same number of years.
One brother ends up with over two million dollars. The other runs out of money completely.
How is this possible? The answer lies in one of retirement planning’s most overlooked dangers: sequence of return risk. We see this phenomenon threaten retirement plans every single day. Therefore, understanding this critical concept could mean the difference between a comfortable retirement and a financial crisis.
The Market Doesn’t Care About Your Plans
Here’s the harsh reality we share at our educational workshops throughout the North Metro area: no one can control what the market’s going to do, and the market doesn’t care about your plans. You may have carefully planned your retirement date, built up your portfolio over 20 or 30 years, and feel ready to start withdrawing income. However, the market doesn’t consult you about your timeline.
This is where many traditional retirement plans fall dangerously short. Additionally, most people operate in averages when thinking about their portfolios. They’ll say things like, “The S&P has averaged X percent over the past 30 years.” While that’s not worthless information, it’s extremely dangerous to apply those averages to your actual retirement plan.
Why? Because averages don’t work the same way when you’re withdrawing money from your portfolio.
The Math That Changes Everything
Let’s walk through a simple example that illustrates why sequence of return risk matters so much. In fact, this math is so counterintuitive that many people don’t believe it at first.
Consider four simple numbers: negative ten, positive ten, negative ten, positive ten. Add those together and divide by four. You get zero. That’s your average return. Basic math, right?
Now here’s where it gets critical. When calculating that average, the order doesn’t matter. You could arrange those numbers in any sequence and still get the same zero average. However, when it comes to your actual investment dollars, the order matters tremendously.
Here’s why: If you have a million dollars and you lose ten percent, you now have $900,000. Then, if you gain ten percent back, you’re only gaining ten percent of $900,000—not ten percent of a million. You lost $100,000 but only gained back $90,000. Consequently, you’re not back to a million dollars.
Real Numbers, Real Impact
Let’s continue with that example to show the full impact. Start with $1,000,000. Apply a ten percent loss: you’re at $900,000. Another ten percent loss brings you to $810,000. Now add two years of positive ten percent returns. You end up at $980,100.
Remember, that’s a zero percent average return. Nevertheless, you don’t have a million dollars anymore. You have $980,100.
And that’s without withdrawing any income.
Now imagine this scenario when you’re also taking monthly withdrawals for living expenses. The situation becomes significantly worse. In fact, you’re forced into selling shares when the market is down, locking in those losses. Then you have fewer shares participating in any eventual recovery. This creates a vicious cycle that can devastate even well-funded retirement accounts.
The Two Brothers: A Tale of Timing
This brings us back to our two brothers—let’s call them Al from Alpharetta and Jim from Johns Creek. Both started with a million dollars. Both had identical portfolios. Both withdrew the same income. Both lived the same number of years.
The only difference? Jim retired in 2000. Al retired in 2010.
That single difference in timing—which neither brother could control—meant they experienced the same market returns in a different order. After ten years, Jim had $874,000 remaining. Al had only $96,000 left and was about to run out of money entirely.
Same returns. Same strategy. Drastically different outcomes.
This is sequence of return risk in action. Furthermore, it’s not a theoretical problem. We see it affecting real people with real retirement dreams every day.
The Traditional Approach Isn’t Enough
Most traditional financial advice focuses on managing risk through the right mix of stocks and bonds. However, that’s not a real solution to sequence of return risk. The name of the game isn’t just making sure you have the right amount of risk. Instead, the name of the game is ensuring that no matter what’s happening in the market, you always have a bucket of money to pull from that is not going backwards.
Consider what happened in 2022. Both stocks and bonds were down at the same time. Stock portfolios dropped around 20 percent. Bond portfolios fell about 13 percent. Therefore, if your entire strategy is based on a stock-bond mix, where do you go for your safe money? You don’t have any.
If that’s your solution, it’s not protecting you from sequence of return risk.
The Power of Polarization
We talk about this principle constantly with our clients: you need polarity in your portfolio. This is a critical concept, so let’s break it down clearly.
Polarity means you have two starkly different types of money. Think of it like a battery—you have a positive end and a negative end. They’re exact opposites. Similarly, your portfolio needs two distinct buckets of money.
Most portfolio managers and 401(k) plans operate in what we call “the squishy middle.” Everything is a blend of stocks and bonds, trying to do multiple things at once. It’s the Swiss Army knife approach to investing. However, when you need specific tools, you don’t want something trying to do everything. If you need a hammer and a knife, you want a heavy hammer and a sharp knife—not one tool trying to be both.
Here’s how polarization works:
The Growth Bucket: This is money that stays in its lane. It’s growth-oriented, more aggressive, and has its ups and downs. Its purpose is to grow over time. It doesn’t try to be safe. It just focuses on growth.
The Safe Bucket: This is money that has two critical characteristics. First, it must have the possibility of beating inflation. Cash under the mattress, most money markets, and many CDs don’t count because they lose to inflation. Second, it must have a floor of zero. Regardless of who’s president, what interest rates do, or how the markets perform, this money cannot go backwards.
When you have both buckets properly set up, you can weather market storms. During down years, you pull from the safe bucket. Your growth bucket stays invested and doesn’t force you to sell at a loss. In fact, you’re not forced into becoming a market timer, which is exactly what happens when you don’t have this structure in place.
Why This Beats the “Balanced” Approach
Here’s something that surprises most people: even if your safe money didn’t grow at all—if you just kept it in cash or buried it in the backyard—a properly polarized portfolio will almost always outperform a “balanced” portfolio trying to do everything at the same time.
We prove this to people in our workshops, and they often don’t believe it at first. Nevertheless, the math is clear. When you have truly safe money to pull from during market downturns, you avoid the devastating cycle of selling low and buying high. You protect yourself from sequence of return risk.
On the other hand, if all your money is in that squishy middle, you’re completely subjected to the whims of the market. You’re forced to try to time your withdrawals perfectly. You have to guess when to sell, when to hold, when to take income. You’re controlling the one variable that none of us can actually control—and that’s a recipe for disaster.
The only way that approach works out is if you get lucky with timing or if you have way more money than you actually need. For most people, neither of those options is realistic.
The Real Cost of Getting This Wrong
Let’s be clear about what’s at stake. If you retire and experience significant losses early in retirement while withdrawing income, you’re selling shares at their lowest values. Then, when the market recovers, you have fewer shares participating in that recovery.
This creates a situation where your cumulative returns over a ten-year period might actually be positive—your average return is a positive number even when you factor in the losses. Yet you can still have less money after ten years than you started with.
That phenomenon might blow your mind, but it’s absolutely possible. In fact, it happens more often than people realize. And it’s entirely due to the order in which those returns come in combined with the timing of your withdrawals.
Taking Control of What You Can Control
You cannot control when the market goes up or down. You cannot control sequence of return risk through market timing. However, you can control how your portfolio is structured.
We stress test every client’s portfolio for sequence of return risk and many other often-overlooked factors. We don’t just look at average returns. We examine what happens when returns come in different orders. We analyze how income withdrawals affect your portfolio in various market scenarios. We ensure you have true polarization—money that’s really growing and money that’s truly safe.
If you haven’t had this conversation or done this math, you don’t have a complete financial plan. Therefore, we encourage you to take this seriously. Even if some of the details in this discussion got lost or if you think we missed something, reach out to us. This topic is too important to overlook.
Recognized Excellence in Financial Planning
Best Financial Planner in Woodstock, GA for 2023, 2024, and 2025
This recognition reflects our commitment to providing comprehensive, education-based financial planning that addresses critical issues like sequence of return risk. We don’t just manage portfolios—we build customized strategies that help you navigate the real challenges of retirement.
Your Next Steps
If anything in this discussion resonated with you—or even if you disagree with something we said—we invite you to have a conversation with us. We offer a no-cost 3 Meeting Retirement Planning Process. This gives you the opportunity to explore these concepts in detail, see how they apply to your specific situation, and determine if our approach is right for you.
You can reach us at 770-485-1876 or visit our website at https://www.vincentplanning.com.
We also host educational workshops throughout the North Metro area where we dive deep into topics like sequence of return risk, polarized portfolios, and other critical retirement planning concepts. Every person who attends tells us they learned something actionable they can implement, whether they decide to hire us or not. Call us to find out when the next workshop near you is scheduled.
For personalized financial guidance, reach out to Vincent Financial Group today to schedule a consultation.