When Timing Goes Wrong: What HNW Investors Need to Know About Sequence of Returns Risk

Most seasoned investors understand that markets fluctuate. What often goes unnoticed, however, is the timing of those fluctuations and how profoundly it can affect a retirement strategy. For those drawing income from their portfolios, the order in which returns occur can quietly erode wealth, even when the average return appears healthy.

This phenomenon is known as ‘sequence of returns’ risk. And for those in or near retirement, it’s not just a nuance. It’s a potential derailment.

Let’s unpack why return timing can be just as consequential as return averages, and what proactive strategies can help protect your wealth from this underestimated threat.

Why Sequence Matters

Imagine two investors, each earning the same average annual return over a 20-year retirement period. Yet one experiences strong market performance in the early years, while the other faces losses right out of the gate.

On paper, their average return is identical. But the outcomes are anything but.

Why? Because once account withdrawals begin—as they typically do in retirement—the order in which those returns occur starts to matter. When losses happen early, you're drawing income from a shrinking portfolio. Each withdrawal compounds the damage, locking in losses and reducing the base that future growth depends on.

It’s not just a temporary dip. It’s a structural setback. The portfolio that takes early losses may never fully recover, even if the market eventually does.

This is the essence of sequence of returns risk: not just volatility, but poorly timed volatility, paired with income withdrawals.

Why Even Significant Wealth Has Its Vulnerabilities

For many high-net-worth investors, there’s a quiet confidence that comes with having a sizable portfolio. And understandably so. Assets in the $3 million, $5 million, or even $10 million range can provide tremendous flexibility, open doors to sophisticated strategies, and offer a strong financial cushion.

But wealth doesn’t equal immunity.

Sequence of returns risk is portfolio-size agnostic. In fact, larger portfolios often come with greater complexity—more account types, more tax exposure, more long-term goals to coordinate across generations. And when income is being drawn from those assets, early negative returns can still undermine sustainability, just more subtly.

Consider the real-world impact:

• Annual gifting plans to children or grandchildren may need to be paused or scaled back.
• Charitable commitments might be delayed or reduced.
• A portfolio that was meant to support two generations may fall short of that goal.
• Lifestyle choices once taken for granted (travel, real estate, legacy planning) could be reconsidered, not because funds disappeared, but because timing created pressure.

And these consequences often surface after the fact, once the ability to course-correct is limited.

To complicate matters further, portfolios that are heavily concentrated in illiquid assets, such as business interests, real estate, or a dominant stock position, may lack the flexibility to generate income during a downturn without incurring losses or triggering tax consequences.

And that’s only part of the picture. Combine sequence risk with rising longevity and the potential for future tax increases, and the need for proactive planning becomes even more urgent.

The takeaway? Even robust portfolios need intentional stress testing. Because when you’ve worked hard to build meaningful wealth, preserving it on your terms requires more than just optimism and historical averages.

How to Protect Your Portfolio From Bad Timing

The good news is that while market timing itself is impossible, sequence risk is manageable. And mitigation starts with structure.

The strategies below are simple in concept but powerful when used together and customized to your specific circumstances—which is where the real value lies.

1. Consider a Multi-Bucket Strategy

Segmenting assets by time horizon can help create both clarity and control. For instance:

• Short-term (0–2 years): Reserve in cash or ultra-short bonds to fund predictable withdrawals.
• Mid-term (3–7 years): Allocate to high-quality fixed income for modest growth with lower volatility.
• Long-term (8+ years): Invest in equities or alternative growth assets positioned to outpace inflation.

This structure reduces emotional decision-making during downturns and minimizes the risk of liquidating assets at depressed prices.

Pro Tip: This strategy becomes even more effective when paired with liquidity event planning (e.g., business sale proceeds, RSUs, trust distributions) and tax-lot-aware drawdowns, not just account-level segmentation.

2. Build Flexibility Into Your Income Plan

Rigid withdrawal rules can be dangerous in volatile markets. A plan that allows for temporary reductions in discretionary spending, such as travel, gifting, or large purchases, can dramatically improve portfolio longevity.

The key is to predefine which spending is fixed versus flexible and establish decision rules in advance.

Pro Tip: Pair this with spending guardrails or dynamic withdrawal models to create an adaptive framework that responds to market and portfolio conditions.

3. Anchor Core Expenses with Guaranteed Income

When foundational expenses like housing, food, and healthcare are covered by predictable sources including Social Security, pension income, or annuities, you reduce the risk of having to sell growth assets at the wrong time.

For affluent investors, layering in private pension strategies or laddered deferred annuities can also help provide this income without locking up unnecessary liquidity.

Pro Tip: Don’t overlook the role of bond ladders, municipal bonds, or cash value life insurance as alternative guaranteed-income layers with tax or estate advantages.

4. Coordinate Tax-Efficient Withdrawal Sequencing

Which accounts you draw from—and in what order—has profound implications for both your portfolio longevity and lifetime tax liability.

A common approach is to start with taxable accounts, then draw from tax-deferred IRAs and 401(k)s, and preserve tax-free Roth assets for last. But the optimal sequence often depends on your expected future tax brackets, Required Minimum Distributions (RMDs), and estate planning goals.

Pro Tip: Coordinate withdrawal strategies with Roth conversion planning, donor-advised funds (DAFs), Qualified Charitable Distributions (QCDs), and income smoothing techniques to reduce long-term tax drag and increase optionality.

Final Thoughts

If you’re within a few years of retirement or already navigating the drawdown phase, now is the time to reinforce your plan. Because the true test of a portfolio isn’t how it performs in bull markets. It’s how it sustains you through challenging ones.

That’s why sophisticated wealth planning must account for more than asset allocation. It requires a resilient, tax-smart income strategy that considers not just how much you have, but how and when you’ll use it.

Curious how your plan might hold up in a volatile start to retirement? Consider stress-testing it with the help of our team of in-house specialists. We can help you refine your income strategy, optimize your withdrawals, and preserve the long-term vision you’ve worked hard to build.

Because growing wealth is only half the equation. The other half is making sure it’s there when you need it most.

The information presented is for educational purposes only and is not intended to be a comprehensive analysis of the topics discussed. It should not be interpreted as personalized investment advice or relied upon as such.

Allworth Financial, LP (“Allworth”) makes no representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of the information presented. While efforts are made to ensure the information’s accuracy, it is subject to change without notice. Allworth conducts a reasonable inquiry to determine that information provided by third party sources is reasonable, but cannot guarantee its accuracy or completeness. Opinions expressed are also subject to change without notice and should not be construed as investment advice.

The information is not intended to convey any implicit or explicit guarantee or sense of assurance that, if followed, any investment strategies referenced will produce a positive or desired outcome. All investments involve risk, including the potential loss of principal. There can be no assurance that any investment strategy or decision will achieve its intended objectives or result in a positive return. It is important to carefully consider your investment goals, risk tolerance, and seek professional advice before making any investment decisions.