The Retirement Cliff: Protecting You from Nasty Market Timing

By Zach Lundak | June 13, 2025

The Order of Your Returns Matters More Than You Think

You've worked your entire career, diligently saved a few million bucks, and you're finally ready to rip off the bandaid and step into retirement. It's a dream come true, right? But what if the market crashes right before or early in your retirement? Most people don't fully grasp just how significant a risk this can be.

Let’s go through the ins and outs of what's known as "The Retirement Cliff," or more formally, Sequence of Return Risk. It's not just your average returns that matter; it's the order in which you receive those returns that can make or break your retirement plan.

The Hidden Danger: Understanding Sequence of Return Risk

Imagine you have a $4 million portfolio, and you plan to withdraw $150,000 to $200,000 per year to cover your living expenses. Now, picture this: the market suddenly drops by 22% in the first year of your retirement. You're forced to withdraw money from a shrinking account, effectively locking in those losses permanently.

This isn't a hypothetical fear; it's a reality that has impacted retirees before, notably in 2000, 2008, and even as recently as 2022. While these were some of the worst calendar year returns, looking at portfolio visualizer data for a typical 60/40 portfolio reveals truly nasty drawdowns – for instance, the Great Financial Crisis saw a nearly 30% drawdown in what many would consider a relatively conservative allocation.

Visualizing the Impact:
Lucky vs. Unlucky

To truly grasp the danger of Sequence of Return Risk, let's visualize
it with two investors: Lucky and Unlucky. Both start with the same
portfolio and experience the exact same returns over
five years: +15%, +8%, -6%, +4%, and +15%.

The crucial difference? Unlucky experiences the -15% return in their very first year of retirement, while Lucky experiences the +15% return in their first year. You might think, "They receive the same returns, so it shouldn't make a difference, right?"

Yet, if you look at their portfolio values at the end of the five-year period, there's almost a quarter-million-dollar difference in their portfolio value! This disparity is solely based on the timing of those returns.

The retirement cliff is so impactful because withdrawing assets during a market downturn forces you to sell low, which locks in losses. This can critically impair your portfolio's ability to ever fully recover, making timing significantly more important than many initially realize.

Strategies to Mitigate the Retirement Cliff

While you can't control market timing, you can implement strategies to reduce your exposure to sequence of return risk:

1. Build a Robust Cash Buffer

One of the most effective and straightforward ways to mitigate this risk is to have a cash buffer of 12 to 24 months' worth of living expenses in reserve.

  • Protection: This cushion prevents you from being forced to sell assets when their value is down. During a downturn, you can draw from your cash buffer instead of your investment portfolio.

  • Peace of Mind: Knowing you have this accessible fund provides immense peace of mind during volatile market periods.

2. Master Tax-Smart Withdrawal Strategies

Thoughtful planning around which accounts you withdraw from can significantly extend your portfolio's longevity.

  • Strategic Pulls: By strategically choosing to pull funds from different types of accounts (e.g., taxable brokerage accounts, tax-deferred IRAs/401(k)s, tax-free Roth accounts) at different times, you can minimize your tax bill over the long term.

  • Compounding Savings: These tax savings compound over the years, helping your portfolio last longer and more effectively meet your retirement goals.

3. Stress-Test and Prepare Mentally

Preparation is key, both financially and psychologically.

  • Portfolio Stress-Testing: Work with a financial planner to run Monte Carlo simulations or other statistical analyses. These simulations can stress-test your portfolio against thousands of potential market scenarios, helping you understand how it might perform under various conditions, including severe downturns.

  • Mental Preparation: Perhaps even more critical is mentally preparing yourself for market volatility. Run your current portfolio's dollar amount through historical market downturns (like 2000 or 2008) and visualize what would have happened. It can be distressing, but understanding that market drawdowns are an inevitable part of investing will make you far better equipped to handle them when they occur.

Plan Proactively for a Resilient Retirement

The Retirement Cliff, or sequence of return risk, is a significant challenge in retirement planning, but it's not insurmountable. By understanding the risk and implementing proactive strategies like maintaining cash buffers, optimizing withdrawals, and mentally preparing, you can build a more resilient retirement plan.

At Barrett FP LLC, we offer expert financial planning on an hourly basis, focused entirely on helping you achieve your goals.

Learn more about how we can help you navigate complex retirement risks and see if we're a good fit.