Insights
Published March 24, 2026 by Harbor Point Advisors
Meet two people. Call them Bob and Karen.
Both retire at 65 with $500,000 in their 401(k). Both average the exact same rate of return over 20 years. Both pull out the same amount every year.
Bob runs out of money at 79. Karen still has a healthy balance at 90.
Same balance. Same average return. Same withdrawals. Completely different outcomes.
The only difference? The order that the gains and losses showed up.
Sequence of returns risk is the danger that gains and losses arrive in an unfavorable order once you are withdrawing from retirement accounts. Two people can have the same starting balance, withdrawals, and average return yet face different outcomes because early losses shrink the balance available for a recovery.
That is sequence of returns risk. And it is one of the most dangerous things you have never heard of.
Sequence of returns risk matters most after retirement because withdrawals and market losses can happen at the same time. Selling shares after a decline to cover living expenses leaves fewer shares to participate in a recovery, so early bad years can have a lasting effect on the account.
Why Accumulation and Distribution Are Totally Different Games
When you are in your 30s and 40s putting money into a 401(k), a down year is not that big of a deal. You are adding money. You are buying more shares at lower prices. Time is on your side and the market eventually recovers.
Retirement flips that equation completely.
The moment you start pulling money out, a down year does not just hurt. It does permanent damage. And the earlier in retirement it happens, the worse the outcome.
Here is why. When the market drops and you are withdrawing at the same time, you are selling shares at the bottom to cover your living expenses. Those shares are gone. They are not there to participate in the recovery. So when the market comes back, you are earning gains on a smaller pile than you started with.
You can never fully dig out. The math just does not work in your favor anymore.
Early market losses can be especially damaging when you are also taking regular withdrawals. In this example, losses and withdrawals sharply reduce the account before recovery gains arrive, leaving those gains to work on a smaller balance and making recovery harder.
The Numbers That Make This Real
Let's say you retire with $500,000 and plan to pull out $30,000 a year. In your first two years of retirement, the market drops 25%. Your account is now worth around $320,000 after withdrawals and losses combined.
Now the market recovers strongly for the next several years. Great news, right?
Not really. Because you are earning those recovery gains on $320,000, not $500,000. You are climbing back from a hole while still making withdrawals. The account never fully recovers. The math compounds against you until eventually the money is gone, years before you expected.
Now flip it. Same person, same return averages, but the good years come first and the bad years come at the end. The account survives comfortably because those early gains built a cushion big enough to absorb the losses later when the balance was already lower.
Same average return. Completely different life.
That is not investing. That is a coin flip. And you are betting your retirement on it.
Average returns do not show when gains and losses occurred, which can matter once you depend on an account for income. When good years arrive early rather than bad years, the same average return can lead to a different balance because early gains may build a cushion.
The Part That Makes People Angry
When I explain this to people, there is usually a moment of silence. Because most of them have been told their whole lives that the market averages around 7 to 10 percent and they will be fine.
Nobody told them that averages lie in retirement.
Nobody told them that a 50% loss requires a 100% gain just to break even. Nobody told them that the year they choose to stop working could determine whether their money lasts 15 years or 30 years, and that choice has almost nothing to do with how hard they saved.
It has everything to do with timing. And nobody gets to control timing in the market.
A zero floor is designed to avoid losses that might otherwise require recovery during retirement. With that approach, a flat year remains a flat year rather than a loss, which can change how retirement timing and market declines are experienced.
Why Zero Is the Antidote
We talked about the zero floor back in Post 3. This is where it really pays off.
When the market falls, a zero floor can keep index crediting from going negative, which may reduce the sequence risk created by market losses. But it does not make the account immune: policy charges and cost of insurance can still reduce cash value in a zero-credit year, withdrawals still deplete it, and caps can limit how much of a recovery you participate in.
A flat year is just a flat year. You wait. The market recovers. Your gains from the previous years are already locked in and protected. You start participating in the upside from a position of strength, not a hole.
That changes retirement planning entirely. You are not crossing your fingers hoping you retire in a good year. You are not checking the market the morning after you hand in your notice. You go when you are ready, not when the market says it is okay.
The Conventional Answer Is Not an Answer
Diversification, bonds, cash buffers, and a more conservative allocation may help manage retirement risk, but they do not fully solve sequence of returns risk. Bonds have risks, cash loses to inflation, and a lower-risk allocation may trade growth for less danger.
If you bring sequence of returns risk up to a traditional advisor, they will probably tell you to diversify. Hold bonds. Keep a cash buffer. Maybe shift to a more conservative allocation as you get closer to retirement.
That helps. It does not solve it.
Bonds have their own risks. Cash loses to inflation. And a more conservative allocation just means you earn less during the years you can least afford to. You traded growth for slightly less danger.
There is a better way to think about this. And we will get into that in the next post, which is about getting your money out of the tax-deferred system before the window closes.
If you want to see how sequence of returns risk could affect your specific situation, I will pull up an illustration and show you exactly what the numbers look like side by side. Reach out anytime.
Adam Stevens | Harbor Point Advisors | Beyond the 401(k)
(406) 539-3423 | adam@harborpointadvisors.org
This article is educational and general in nature. It is not tax, legal or investment advice and does not account for your circumstances. Indexed universal life insurance is a life insurance product, not an investment. Policy charges, cost of insurance, caps, participation rates and spreads affect results, and cash value can decline in a year when the index credit is zero. Policy loans and withdrawals reduce the death benefit and available cash value, and a lapse or surrender with a loan outstanding can create a taxable event. Any guarantee is subject to the claims-paying ability of the issuing insurance company. Tax treatment reflects current law, which can change. Talk with a qualified tax, legal or financial professional about your own situation.
Harbor Point Advisors. Bozeman, Montana. (406) 539-3423. Serving clients nationwide.
Harbor Point Advisors is an insurance agency. Adam Stevens is a licensed insurance professional, license number 3004330767, NPN 22297129. Not a registered investment adviser or broker-dealer.
This article is educational and is not individualized investment, tax, or legal advice.