The Retirement Risk Nobody Is Talking About

Two brothers. One retirement. Completely different outcomes.

Meet Robert and David. Both are 65 years old. Both spent 35 years saving diligently. Both retire with exactly $1,000,000 in their investment accounts. Both withdraw $50,000 per year. And over the next 20 years, both earn the exact same average annual return of 7%.

Same average return. Same starting balance. Same withdrawals. Completely different lives.

What is sequence of returns risk?

During your working years, market volatility is largely your friend. When markets drop, you buy more shares at lower prices. When markets recover, all those shares rise in value. Decades of consistent saving smooth out the bumps. This is dollar-cost averaging, and it works beautifully during the accumulation phase of your financial life.

But retirement changes everything. The moment you begin withdrawing from your portfolio, you flip the equation entirely. Instead of buying shares during downturns, you are forced to sell them — at exactly the wrong time, at depressed prices — just to cover your living expenses. And the shares you sell are gone forever. They cannot participate in the recovery.

The history that should keep you up at night

This is not a theoretical concern. American retirees have lived through this scenario twice in the last twenty-five years, and both times the damage was severe and lasting.

The Lost Decade: 2000–2002

From the peak of the dot-com bubble in March 2000 through the bottom in October 2002, the S&P 500 lost approximately 49% of its value. Someone who retired in January 2000 with a million-dollar portfolio faced three consecutive years of significant losses at the very start of retirement. By the time markets recovered, their portfolio had been so depleted by forced selling at the lows that many never fully recovered — even though the market itself eventually did.

The Financial Crisis: 2007–2009

From October 2007 through March 2009, the S&P 500 fell approximately 57% — the worst decline since the Great Depression. A retiree who began drawing down their portfolio in 2006 or 2007 faced a devastating combination: large portfolio losses, continued withdrawals, and the psychological difficulty of staying invested through a historic collapse. Many didn't. They sold at the bottom, locked in permanent losses, and never recovered.

Source: S&P 500 historical data. Past performance does not guarantee future results.

Recovery times are measured in years, not months. A retiree who entered the 2000 bear market waited seven years to get back to even — while withdrawing $50,000 every single year.

Why the risk is especially high right now

There is a well-established relationship between the valuation of the stock market at the time you retire and the likely returns over the following decade. By the most widely followed long-term valuation measure — the Cyclically Adjusted Price-to-Earnings ratio (CAPE), developed by Nobel laureate Robert Shiller — US equities are currently priced at levels that have only been exceeded briefly around the peak of the dot-com bubble in 2000.

High valuations don't guarantee a crash. But they do mean the probability distribution of outcomes for the next decade is skewed in a direction that most retirement plans are not designed to handle. The 4% withdrawal rule — the cornerstone of most retirement income planning — was derived from data that includes many periods of average and below-average valuations. Applying it at today's valuations without adjustment is not conservative financial planning. It is optimistic financial planning wearing the costume of conservatism.

And there is one more complication. The traditional hedge against equity risk in retirement — bonds — has its own challenges. In 2022, a year when retirees needed bonds to cushion a 25% equity decline, a diversified bond portfolio fell roughly 13% simultaneously. The 60/40 portfolio fell approximately 16% that year. The supposed shelter did not shelter.

Stocks are expensive. Bonds carry their own risks. Cash loses purchasing power to inflation. The standard playbook may not be adequate for the environment ahead. This is not a reason to panic. It is a reason to have a better strategy.

Trend following: a different way to think about risk

Trend following is a systematic investment approach with roots stretching back decades in professional money management. The idea is straightforward: financial markets move in sustained trends. When a trend changes direction, there are measurable signals in price behavior that precede and accompany the transition.

Rather than holding a static allocation and absorbing whatever the market delivers — including 50% drawdowns — a trend-aware strategy uses objective, rules-based signals to identify when risk is elevated and adjust accordingly. The goal is not to predict the market. It is to respond to what the market is actually doing.

The math that matters

The goal is not to predict the market. It is to respond to what the market is actually doing — and reduce the damage when it turns against you.

What this looks like in practice

A trend-aware strategy applied from 2000 through 2025 has historically demonstrated the ability to significantly reduce drawdowns during severe declines while participating meaningfully in the bull markets that followed. The tradeoff is straightforward: some lag during strong bull markets in exchange for meaningful protection during the storms. For a retiree who cannot afford a catastrophic loss, this tradeoff is not a disadvantage. It is the point.

Illustrative of trend following principles generally, not a guarantee of future results. Past performance does not guarantee future performance.

The tax integration advantage

Most conversations about investment strategy stop at the investment level. We believe that is only half the picture. Every decision to reduce equity exposure, harvest losses, rebalance a portfolio, or shift between asset classes has tax consequences. A strategy that reduces a drawdown by 20 percentage points but triggers unnecessary capital gains has given back some of its advantage to the IRS. A strategy executed with your full tax picture in mind can simultaneously protect your portfolio and improve your long-term after-tax wealth.

When a trend following signal indicates it is time to reduce equity exposure, a tax-aware execution might harvest losses in the positions being sold, use those losses to offset gains elsewhere, and consider the client's marginal tax rate and income before deciding which accounts to execute in. None of this changes the investment decision. All of it changes the after-tax outcome.

When your investment advisor and your tax advisor are the same team — when the left hand knows exactly what the right hand is doing — every decision considers your complete financial picture. For retirees with complex tax situations — Social Security income, required minimum distributions, Roth conversion opportunities, business sale proceeds, or inherited assets — this integration is not a nice-to-have. It is a core part of whether the retirement income strategy actually works as planned.

Questions your current plan may not be answering

Every person within ten years of retirement — and every person already in retirement — deserves honest answers to these questions. If you have not had these conversations with your current advisor, it may be worth asking them.

• If the market drops 40% in the first three years of my retirement and I continue my planned withdrawals, what does my portfolio look like at age 75? At age 85?
• How does my current investment strategy respond to a severe bear market? Does it hold through the entire decline, or does it have a systematic mechanism to reduce damage?
• My plan assumes a long-term average return. How does it perform if the next decade delivers significantly below-average returns due to today's high starting valuations?
• In 2022, when both stocks and bonds fell simultaneously, what happened to my portfolio? Is my strategy built to handle that kind of environment again?
• How are my investment decisions being made in coordination with my tax situation? Is my advisor aware of my cost basis, my income level, my Roth conversion opportunities?
• What is my plan for Required Minimum Distributions, and how do they interact with my investment strategy and tax bracket?

These are not trick questions. They are the questions that separate a retirement plan built for average conditions from one built for the full range of conditions you might actually face.