Sequence matters when it comes to retirement finances

We walk before we run. We date before we marry. We sink before we swim.

Sequence matters in our lives. It also matters when we plan our retirement-withdrawal strategies.

Standard practices are a little odd. Your planner sits you down and says you can spend 4% of your portfolio for the next 30 years without running out of money. That seems simple enough.

But imagine you came to your adviser four days after President Donald Trump’s Liberation Day tariffs from April and your S&P portfolio was down 12%. Would that mean that you should have scheduled your appointment a couple of weeks earlier so you would have more to spend?

Great wealth often comes from undiversified risk. Billionaires Jeff Bezos, Elon Musk or Bill Gates made their money by owning concentrated positions in companies that did outrageously well. But undiversified risk doesn’t work so well when you are trying to live off your portfolio.

The variability of outcomes in concentrated positions is so large, it makes them unpredictable. Concentrated positions do not only occur with individual companies, they can occur with entire markets.

From 2010-2025, the S&P 500 (large U.S. stocks) returned more than 13% a year, including dividend reinvestment. You could easily have spent 4% or 5% of your investments and still had more money than the day you retired.

Sequence matters. As does diversification.

After 15 strong years of S&P returns, managing risk is essential. The two ways to guard against sequence of return risk are by holding cash and diversifying.

Keeping two to three years’ worth of spending in cash means you don’t have to sell stocks to meet your income needs if the markets are down. Owning various asset classes (large and small, U.S. and international stocks and bonds) means you have more cushion should one particular asset class suffer.

If you had 20% of your portfolio in bonds and a two-year cash cushion, you could ride out multiple years of stock declines before having to liquidate stocks.

Don’t let bad sequences of returns through a lack of diversification sink your retirement.