The Retirement Risk Nobody Warns You About Until It's Too Late
If you own a business and are thinking about selling, beware of*sequence of returns risk. This is one of the most underestimated forms ofretirement portfolio risk, and it can quietly drain your savings in its first five years.
It is not just about the market's ups and downs. It is about when those ups and downs happen. In my 32 years advising owners, I have seen this trap catch many newly retired business owners off guard.
**Key takeaways*
- Sequence-of-returns risk is about the*order*of returns, not the average, and it is most dangerous in the first few years of retirement when you are withdrawing.
- Selling a business concentrates the danger: your whole net worth becomes investable on a single day you did not choose.
- You cannot control the market you retire into, but you can build a spending floor, hold reserves, and stage how you deploy a lump sum.
What is sequence-of-returns risk?
Sequence-of-returns risk is the danger that poor investment returns in the first few years of retirement, combined with the withdrawals you are making to live on, permanently shrink your portfolio, even if the market later recovers. Two retirees can earn the same average return over 30 years and end up in completely different places based only on the order those returns arrived. The first five years matter most. You cannot control them, but you can plan around them.
Why the order of returns matters more than the average
Picture two retirees with identical portfolios who both average the same return over their retirement, but in a different order. The one who hits poor returns early, while drawing income, can end up far worse off than the one who gets the same poor returns later. These figures are hypothetical and shown only to illustrate how the order of returns works; they are not a projection of any actual portfolio, and individual results depend on your own facts and circumstances.
The math behind safe withdrawal rates was first mapped byWilliam Bengen in his 1994 Journal of Financial Planning studyand later reinforced by the 1998Trinity Study, both of which showed why early losses are so dangerous for a portfolio you are drawing from.
A simple example: same average, very different outcomes
Consider two hypothetical retirees. Both experience the same average return over 30 years, but the order of those returns varies. One enjoys gains early on, while the other faces losses. The retiree with early gains can recover from later losses, while the other struggles to maintain their portfolio's value.
Why the first five years of retirement are the most dangerous
Retiring into a down market is the worst-case timing, because you are selling assets to fund living expenses at exactly the moment prices are depressed.
Withdrawals turn a paper loss into a permanent one
When you withdraw funds during a market downturn, you're locking in losses. This can permanently reduce your portfolio's value, making it harder to recover when the market rebounds.
Why recovery math works against you when you are spending
If your portfolio drops by 20%, you need a 25% gain to get back to even. But if you're withdrawing funds, the required recovery rate is even higher. This is why early losses can be so damaging.
The hidden version of this risk after selling a business
When your entire net worth becomes investable on a single day
After selling a business, your net worth often becomes liquid all at once. This creates a unique sequence-risk profile. Investing everything at once can expose you to significant risks if the market turns.
The "finish line" mistake I see owners make again and again
In my experience, here is the pattern I often see again and again. An owner will spend a decade getting the sale right: the tax structure, the earnout, the working-capital peg, every comma in the purchase agreement. Then they spend roughly zero minutes on the first five years after the money lands.
Picture a composite case, the kind I have sat across from many times. A manufacturing owner who built an unglamorous business over thirty years sells it, then wants to deploy the entire proceeds the same quarter, because waiting feels like leaving something on the table. I understand the instinct.
The hard part to hear is that the day you sell is not the finish line. It is the start of the most fragile window your money will ever sit in. This is sequence risk after selling, and deploying everything at once removes a choice you may wish you had kept.
I have written before aboutwhat actually happens after the sale closes, because the months right after a closing are when this risk does the most damage.
How to protect retirement income from a flat or down decade
- Build a spending floorthat doesn't depend on the market.
- Hold enough in reservesto avoid selling at the bottom.
- Stage the deploymentof a lump sum instead of investing it all at once.
- Separate the moneyyou need soon from the money you can leave alone. I have advised owners through four recessions now, and the same thing surprises people every time. The folks who came through a flat or falling market with their composure intact were not the ones holding cleverer funds or a hotter manager. What set the calm clients apart was simpler and far less glamorous. Before the market turned, they had already decided where their next few years of spending would come from, and it was not the part of the portfolio that was dropping. They were not forced to sell at a bad price to cover the mortgage that month. That mindset is not unique to retirees. It is how the very largest portfolios are run, and there are lessons inhow larger portfolios are structured for resilienceand inwhat four recessions taught me about staying invested.
What a "lost decade" would actually mean for a new retiree
If the market stagnates, retirees relying on investment returns for income may struggle. A flat or negative decade would mean lower-than-expected returns just as you start drawing income, which is exactly the setup that makes sequence risk bite. A2026 Morningstar discussion raised the possibility of a flat or negative "lost decade"for investors who are retiring now. Nobody can predict whether that happens, which is the point: the plan should not depend on the market cooperating.
Holding the entire proceeds in cash is not the answer either, as I explain inwhy parking the proceeds in cash creates its own risk. The investors who weather an early downturn are usually the ones who understandwhy time in the market beats timing it.
Frequently Asked Questions
What is sequence-of-returns risk in simple terms?Sequence-of-returns risk is the danger that poor returns early in retirement can permanently reduce your portfolio, even if the market later recovers.How many years of retirement carry the most sequence risk?The first five years of retirement carry the most sequence risk.Does sequence risk matter if I never withdraw from my portfolio?Sequence risk primarily affects those who withdraw from their portfolios, as withdrawals during downturns can lock in losses.How is sequence risk different from market risk?Sequence risk is about the order of returns, while market risk is about the overall market performance.I just sold my business, should I invest the proceeds all at once or gradually?It's often safer to stage the deployment of proceeds to mitigate sequence risk.What is a "bond tent" or "rising equity glide path"?These are strategies to adjust asset allocation over time to reduce risk.Can I avoid sequence risk by just holding cash?Holding cash can avoid sequence risk but may introduce inflation risk and opportunity cost.
Work with Pinnacle Wealth Advisory
If you are within five years of an exit or a retirement date and want a second opinion on how your plan holds up in a flat market,here is how to start a conversation.
This blog post is for informational purposes only and does not constitute legal, tax, or financial advice. Past performance does not guarantee future results. Consult with qualified professionals for guidance tailored to your specific situation. Doug may provide services and conduct business as Pinnacle Wealth Advisory with advisory services offered through SB Advisory, LLC. Registration as an investment adviser does not imply any certain level of skill or training.
Top comments (0)