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Retirement planning is often compared to climbing a mountain. The ascent — the accumulation phase — is about building your wealth, while the descent — the distribution phase — is about strategically living off those savings.

The sequence of returns risk

One of the most significant challenges during the descent is managing sequence of returns risk, which refers to the impact of the order in which investment returns occur during retirement. While the average rate of return dominates discussions during accumulation — because consistent contributions smooth out fluctuations — the sequence of returns becomes crucial during distribution.

Negative returns early in retirement, when withdrawals are being made, can significantly erode a portfolio’s value. This occurs because withdrawals lock in losses, leaving less capital to recover when markets rebound. Managing this risk is critical to ensuring your savings last throughout retirement.

Consider two retirees, each starting retirement at age 66 with $684,848 and withdrawing 5% annually while both achieving an 8% average return over time.

Retiree A begins retirement in a bear market. Early losses in the portfolio, combined with regular withdrawals, deplete his savings to nothing by age 82.

Retiree B starts retirement in a bull market. Early gains provide a strong foundation, allowing her portfolio to grow even after accounting for withdrawals. By age 90, she has $2.5 million in her portfolio.

Why the dramatic difference? While the average rate of return is the same for both retirees, the sequence of returns risk comes into play. For Retiree A, withdrawing during periods of negative returns compounds losses, leaving less capital to benefit from market recoveries. In contrast, Retiree B’s early gains create a cushion, protecting her portfolio from being quickly eroded by withdrawals.

This contrast demonstrates the critical role timing plays in the distribution phase and why managing early losses is essential.

Steps to mitigate sequence risk

Diversify with safe assets. Allocate part of your portfolio to safe, stable assets such as annuities, bonds or CDs. They can be a safety net during market downturns.

Design a flexible withdrawal plan. Work with your adviser to create a strategy that prioritizes pulling from safe assets during bear markets, reducing the need to sell equities at a loss.

Engage experts early. Assemble a team that includes financial professionals, tax advisers and estate planners to ensure your retirement withdrawal strategy aligns with your broader financial goals.

Accumulation to distribution

Reaching the retirement summit is a major milestone, but transitioning from accumulation to distribution requires critical decisions and adjustments. Start by evaluating whether your current financial adviser is equipped to guide you through this phase. Ask yourself:

• Have they created a comprehensive income distribution plan with tax, estate and health care strategies?
• Have they reviewed how your savings will be taxed, including Roth conversions and required minimum distributions (RMDs)?
• Have they helped plan for long-term care and legacy goals?

If these areas haven’t been addressed, you may need a financial professional specializing in retirement distribution planning.

Build a resilient portfolio

A key aspect of retirement distribution is withstanding market volatility while meeting your income needs. To help weather unstable markets:

Balance growth and safety. Combine growth-oriented investments with stable asset.

Visualize your income plan. Use historical market data to simulate potential outcomes, providing confidence in your ability to sustain your lifestyle.

Plan for tax efficiency

Understanding the taxation of different income sources is critical in retirement. “Buckets” of money — taxable, tax-deferred and tax-free — must be strategically managed to reduce tax burdens and maximize income. Strategies like Roth conversions can be particularly effective in lowering future RMDs and reducing taxes on Social Security benefits.

Avoid common retirement myths such as:

The 80% income rule. Many assume retirees need only 80% of their pre-retirement income, but most aim to maintain their full lifestyle. Plan for a realistic spending level to avoid shortfalls.

The 4% rule. While once considered a safe withdrawal rate, the 4% rule doesn’t account for market volatility or today’s low-interest-rate environment. A tailored strategy based on your unique circumstances is more reliable.

Market volatility can derail even the best-laid plans. Working with an adviser who can proactively adjust your portfolio ensures you remain on track despite economic shifts.

© 2025 Kiplinger Washington Editors, Inc. Distributed by Tribune Content Agency, LLC.