What is sequence of returns risk and why does it matter?

When planning for retirement, most people focus on how much they’ve saved. But how and when you take money out of those savings can be just as important. That’s where sequence of returns risk comes in. If you’re wondering what is sequence of returns risk and why does it matter, you’re already on the right track to protecting your retirement.

Let’s break it down in simple terms and talk about how this risk affects your taxes, Social Security benefits, health insurance options, and lifestyle in retirement.

Understanding sequence of returns risk

Sequence of returns risk refers to the danger of experiencing poor investment returns early in retirement when you start withdrawing money from your accounts. Even if your portfolio averages a solid return over time, the order of those returns can make a huge difference in how long your money lasts.

For example, if you retire and the market drops significantly in your first few years, you could be selling investments at a loss just to pay your bills. That compounds the problem and could cause your savings to run out sooner than expected.

Why it matters in real life

Let’s say two retirees have identical portfolios and plan to withdraw the same amount each year. One starts retirement during a market upswing. The other starts when the market is down. Even if they both see the same average return over 20 years, the one who began during a downturn could run out of money years earlier.

This is why retirement income planning needs to be about more than just a target number. It’s about protecting against timing risk and building flexibility into your plan.

At Guerra Wealth Advisors, we help you create strategies that reduce this risk while aligning with your overall retirement goals.

Taxes and sequence of returns

Many retirees are surprised by how much taxes can eat into their savings. When combined with poor market returns, tax mismanagement can create a one-two punch that hurts your retirement plan.

Here’s how sequence of returns risk intersects with taxes:

• Taking withdrawals from taxable accounts during a down market may mean selling assets at a loss.
• Pulling from traditional IRAs or 401(k)s early on could bump you into a higher tax bracket unnecessarily.
• Poor timing of withdrawals could increase your income enough to trigger higher taxes on your Social Security benefits.

With smart taxes in retirement planning, including Roth conversion strategies and coordinated withdrawal planning, Guerra Wealth Advisors can help you reduce the impact of both market losses and taxes.

Social Security strategy matters too

Your Social Security benefit is one of the few sources of guaranteed income in retirement. But when you claim it can greatly affect your total lifetime benefit.

Many people think they should take Social Security as soon as they can. But doing so early during a market downturn can add even more pressure on your investment accounts. Instead, delaying Social Security allows your guaranteed income to grow, helping protect against sequence of returns risk.

A well-timed Social Security strategy gives your investment accounts time to recover from market dips, preserving your long-term financial stability. At Guerra Wealth Advisors, we walk clients through different claiming scenarios to find the strategy that fits their timeline and tax profile.

Health insurance in retirement adds complexity

Before age 65, many retirees rely on private health insurance or marketplace plans. But those plans often come with income-based subsidies. If you are forced to withdraw more from your accounts during a market dip, your income may increase and cause you to lose those subsidies.

Here’s why that matters:

• More income could push you over the threshold for Affordable Care Act (ACA) subsidies
• Without subsidies, you could pay thousands more in annual premiums
• That added cost can be especially damaging if your portfolio is already under stress

This is another reason health insurance in retirement needs to be integrated into your withdrawal strategy. Guerra Wealth Advisors helps ensure that market losses do not cause a ripple effect that leads to higher health care expenses.

Lifestyle protection and peace of mind

Ultimately, protecting against sequence of returns risk is about preserving your retirement lifestyle.

• Do you want to travel frequently?
• Gift to grandchildren or charity?
• Afford long-term care or upgrade your home?

All of these dreams require a reliable income plan. Without protection against early retirement losses, you may need to drastically reduce spending or delay those goals.

That’s why Guerra Wealth Advisors builds flexibility and structure into every plan, including:

• Having a bucket strategy that separates short-term, medium-term, and long-term assets
• Creating a reserve of cash or conservative investments to draw from during down markets
• Implementing tax-efficient withdrawal schedules
• Aligning investment risk with retirement goals, not just returns

How to protect yourself from sequence of returns risk

There’s no way to predict what the market will do the day you retire. But there are ways to reduce the risk of bad timing. Here are a few steps you can take:

• Work with a financial advisor to design a withdrawal strategy before you retire
• Delay major spending or large withdrawals during market downturns
• Use Roth accounts strategically to avoid taxable withdrawals in down years
• Keep 1 to 2 years of expenses in conservative or cash-like assets
• Consider annuities or other guaranteed income products for a portion of your retirement income

At Guerra Wealth Advisors, we help you create a strategy that weathers all market conditions so your retirement feels secure, no matter what the economy is doing.

Take the next step toward protecting your retirement

Understanding what is sequence of returns risk and why does it matter is just the beginning. The real power comes in applying strategies that make your retirement resilient.

Whether you are five years from retirement or already drawing income, there is time to build a more secure future. Let Guerra Wealth Advisors help you create a retirement income plan that protects your savings, optimizes taxes, considers your Social Security strategy, and keeps your lifestyle on track.

Book a free retirement strategy session with our team today. Your future self will thank you.