When we talk about retirement planning, most people focus on average annual returns. But one factor is often overlooked—Sequence of Returns Risk—and for business owners, it can meaningfully impact long-term financial security.
Sequence of returns risk refers to the order in which investment returns occur, particularly in the years leading up to and during retirement. Even if the long-term average return is the same, experiencing market downturns early in retirement can reduce how long a portfolio lasts.
Understanding this risk helps individuals create a more resilient retirement strategy—one that isn’t overly dependent on timing or market conditions.
What Is Sequence of Returns Risk?
Imagine two investors with identical portfolios and identical average returns over 25 years.
If one experiences negative returns early in retirement while the other experiences them later, their outcomes can be dramatically different—even though their average return is the same.
Why?
Because once you begin taking withdrawals, early losses reduce both:
Your account balance, and
How much is left to recover when the market rebounds
This combination can accelerate portfolio depletion.
Why This Matters for Business Owners
Business owners face unique financial dynamics:
1. Retirement Withdrawals Often Coincide With Business Transitions
Many owners retire immediately after selling or exiting their business. If markets decline early in retirement, withdrawals made during a downturn can have a larger impact.
2. Owners Tend to Have Concentrated Wealth
Business equity often represents a significant portion of total net worth. Transitioning this wealth into investable assets requires careful timing and a coordinated plan.
3. Owners May Have Irregular Income Before Retirement
Leading up to retirement, cash flow can fluctuate—especially during a sale, transition, or slowdown. This makes managing investment risk even more important.
4. Owners Are Often “Sequence-Sensitive”
Because many owners retire at a specific milestone—after a sale, buyout, or succession—their timing may be less flexible. Investing without accounting for sequence risk can increase exposure at precisely the wrong time.
How Sequence of Returns Risk Can Impact Retirement
Here’s what can happen when someone enters retirement during a period of market volatility:
Withdrawals during a downturn reduce principal
Less principal means less recovery potential once markets rebound
Over time, this can significantly shorten how long a portfolio lasts
Even strong markets later in retirement may not fully offset early declines.
Strategies to Help Manage Sequence of Returns Risk
No strategy eliminates risk completely, but a thoughtful plan can reduce vulnerability.
1. Create a Cash or Short-Term Reserve
Holding 6–24 months of cash or short-term bonds can create a buffer during volatile markets, reducing the need to sell investments at a loss.
2. Diversify Across Tax Buckets
Coordinating withdrawals from:
Tax-deferred accounts
Roth accounts
Taxable accounts
…allows for more flexibility depending on market conditions.
3. Adjust Withdrawals When Appropriate
Some retirees use “guardrails” to adjust spending slightly during down markets, helping extend portfolio longevity.
4. Coordinate Retirement Timing With Business Liquidity Events
Aligning the sale or transition of the business with a thoughtful investment plan helps reduce exposure to market fluctuations.
5. Maintain a Portfolio Strategy Designed for Retirement Income
A portfolio built for long-term accumulation may not be the same portfolio needed for retirement income. A shift in strategy before retirement can help manage volatility more effectively.
The Bottom Line
Sequence of returns risk is one of the most important—and often most overlooked—components of retirement planning. For business owners, who frequently experience concentrated liquidity events and retirement transitions at specific points in time, understanding this risk is essential.
A well-structured retirement income plan can provide flexibility, reduce vulnerability to market timing, and help support long-term financial stability.