What Is Sequence of Returns Risk in Early Retirement and How Do You Manage It?

When the Market Hits First

You finally made it.

Left your job in your early 50s and moved to a slower rhythm. All the spreadsheet math said you were good to go.

Then year two hits and the market drops hard, or your spending is more than you anticipated.

Now you're staring at your portfolio thinking, "Can I even afford this anymore?"

Early retirement is supposed to feel like freedom. But for many, it quickly becomes a high-stakes numbers game. And many are not prepared to roll with the punches.

Especially when Social Security is still 15+ years away.

The Silent Threat: Sequence Risk and the Spending Shift

Sequence Risk: Timing Can Wreck the Plan

Most people build a financial plan around average returns.

But sequence of returns risk has nothing to do with averages. It’s all about timing.

If your portfolio drops early in retirement and you need to pull money out, you are selling assets at a discount. That means fewer shares are left to recover when the market rebounds.

Even if the market performs well later, the early damage often cannot be undone.

For someone retiring in their 40s or 50s, this risk is a central issue.

No Income Floor and No Cushion

Retire at 65, and Social Security starts soon after. Retire at 48, and you are on your own for a long time.

That gap creates pressure. Your portfolio has to carry the full weight of your lifestyle in the early years.

If markets slide during that time, there is no outside source of income to take the edge off. Everything depends on what you’ve already saved.

This is not a minor technical challenge. It is the core problem early retirees must solve, and one we specialize in at Simplify Wealth Planning.

From Builder to Spender

You spent decades building and watching your net worth climb. For many early retirees, this meant saving aggressively.

And now the plan says: start spending

For many, this feels completely unnatural.

Without a steady income source like Social Security, this mindset shift becomes even harder. It’s psychological, and almost no one thinks they will fall victim to this challenge.

But I’ve worked with some of the most rational people who thought the same, and this was the biggest challenge for them. Constantly having to sell off your assets to fund living expenses is an unsettling experience.

But there are ways to fix it.

Why the 4 Percent Withdrawal Rule Starts to Crack

The 4 percent rule was designed for 30-year retirements with Social Security arriving early in the timeline.

That is not your situation.

If you retire at 45 or 50, you may need your portfolio to last 40 or 50 years (maybe even longer).

One study that looked beyond U.S. markets found that a withdrawal rate of just 2.3 percent was more sustainable for longer timeframes.

The 4 percent rule may still be a useful reference point, but it cannot be your plan.

Your Next Steps

1. Plan Beyond Accumulation

   Your retirement plan cannot stop at saving. You need a blueprint for how your money will create income, especially in the first 15 to 20 years with no Social Security.

2. Design an Income Bridge
   You need a plan to cover the long stretch before benefits kick in. That could mean a larger cash buffer, drawing from taxable accounts first, or even part-time income.

3. Use Guardrails to Adjust Spending
   A fixed withdrawal plan ignores reality. Guardrails let you spend more when markets are up and scale back when they are down. This protects your principal and your peace of mind.

4. Shift Your Mindset on Spending
   Selling investments should not feel like failure. It should feel like freedom. A clear strategy and support can help you shift from hesitation to confidence.

5. Run the Worst-Case Scenario First
   Model what happens if your first five years of retirement are rough. It is better to face those numbers now than to scramble later.

Meme of the Week

Build a Plan That Can Take a Hit

Early retirement is not just about a big number in your investment account.

It is about a strategy that can survive the market’s early punches and keep you on track when the spreadsheet starts to wobble.

You cannot control returns. But you can control your plan.

If you're thinking seriously about retiring early, book your complimentary ‘Are You On Track’ Snapshot to find out how to make it a reality.

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Marcel Miu, CFA and CFP is the Founder and Lead Wealth Planner at Simplify Wealth Planning. Simplify Wealth Planning is dedicated to helping tech professionals master their money and achieve their financial goals.

Disclosures
Simplify Wealth Planning, LLC (“SWP”) is a registered investment adviser in Texas and in other jurisdictions where exempt; registration does not imply a certain level of skill or training.

If this e-mail refers to any client scenario, case study, projection or other illustrative figure: such examples are hypothetical and based on composite client situations. Results are for informational purposes only, are not guarantees of future outcomes, and rely on assumptions specific to the scenario (e.g., age, time horizon, tax rate, portfolio allocation). Full methodology, risks and limitations are available upon request.

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