Why a High Market Can Be Your Biggest Retirement Risk

📉 Why a High Market Can Be Your Biggest Retirement Risk

By Sona Wealth Advisors

Most people think a rising market is great news for retirees.

And it is — until it isn’t.

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Here’s the uncomfortable truth that gets glossed over in bull markets: the timing of your losses matters far more than your average return. And right now, with the S&P 500 down roughly 5% year-to-date after five straight weeks of losses — following three consecutive years of strong gains, including a 17.9% total return in 2025 — this conversation isn’t theoretical. It’s happening.

What is Sequence-of-Return Risk?

It’s a concept that sounds technical but lands like a gut punch once you understand it.

Sequence-of-return risk isn’t about whether your portfolio earns a good long-term average return. It’s about when the bad years hit relative to when you start withdrawing money.

Here’s the illustration that makes it real:

Take two retirees. Same starting balance. Same 30-year average annual return. The only difference: Retiree A experiences the big losses in years 1–3. Retiree B experiences them in years 25–27.

Retiree A runs out of money. Retiree B is fine.

Same average return. Completely different outcomes.

Morningstar portfolio strategist Amy Arnott has called the first five years of retirement the “danger zone” — the window when tapping accounts during a downturn causes the most lasting damage. Morningstar’s own research found that retirees who experienced poor returns in those early years and didn’t adjust their spending were far more likely to exhaust their portfolios entirely, describing it as the single biggest threat to any retirement withdrawal plan.

The Math That Hurts

If you’re withdrawing 4–5% annually from your portfolio and the market drops 30–40% in year one or two of retirement, a compounding problem takes hold:

• You’re selling more shares at depressed prices just to fund ordinary living expenses
• Fewer shares remain to participate in the eventual recovery
• The portfolio is permanently impaired — even if the market fully bounces back

This is the sequence trap. Withdrawals in a down market lock in losses in a way that investors still in the accumulation phase never experience. An employed 45-year-old who rides out a 35% drop is fine — even advantaged, because they keep buying cheap shares. A retiree making the same withdrawals during the same drop faces a fundamentally different math problem.

Investors who retired in 2024 or 2025 may be experiencing this firsthand right now — selling assets at lower prices to fund withdrawals, permanently reducing the shares available to benefit from any future recovery.

High inflation compounds the damage further. If you retired during the 2022 bear market while inflation was running at 9.1%, cost-of-living pressures forced ever-larger withdrawals from an already-stressed portfolio. A rigid withdrawal strategy in that environment would have taken a serious and lasting toll on long-term sustainability.

Why a High Market Makes This Worse

When you’re retiring into elevated valuations — high price-to-earnings ratios, stretched multiples, years of strong returns already in the rearview — the probability of a meaningful near-term correction is statistically higher.

A client retiring at a market peak faces significantly more sequence risk than one retiring after a correction has already occurred. The irony is real: the wealthiest moment of your pre-retirement life can be one of the riskiest times to retire, if it coincides with peak valuations.

This is reflected in the research. Morningstar estimated a safe withdrawal rate of just 3.7% in 2024, citing elevated equity valuations and lower bond yields — a meaningful step down from the widely cited 4% rule. Their most recent estimate revised it slightly upward to 3.9%, but the underlying concern remains: retirees starting from high valuations have less margin for error.

Clients who feel flush right now deserve a candid conversation about what a 20–30% portfolio drop in year one would actually mean for their plan.

What You Can Do About It

The good news: sequence-of-return risk is manageable. It just requires intentional planning before retirement begins — not reactive adjustments after the damage is done.

Cash buffer / bucket strategy. Keep 1–2 years of living expenses in cash or short-term instruments. This means you are not forced to sell equities at depressed prices to fund monthly expenses. You draw from the cash bucket while waiting for markets to recover.

Dynamic withdrawal strategy. Build flexibility into your spending plan. In down years, pull back on discretionary spending — defer the vacation, delay the renovation, or temporarily reduce portfolio withdrawals. This preserves capital and extends portfolio longevity without requiring dramatic lifestyle changes.

Distribution sequencing. The order in which you draw from accounts matters. Pulling from taxable accounts, traditional IRAs, Roth IRAs, cash reserves, or investment accounts in the wrong sequence can create unnecessary taxes, higher Medicare premiums, and more pressure on the portfolio. A thoughtful withdrawal order can help reduce taxes, manage income brackets, and preserve the right assets for later in retirement.

Asset location. It is not just what you own — it is where you own it. Higher-growth assets, income-producing investments, and tax-efficient holdings may each belong in different types of accounts. Good asset location can reduce annual tax drag, improve after-tax returns, and make future withdrawals more flexible.

Balanced asset allocation. A 60/40 portfolio carries meaningfully lower sequence risk than a heavily equity-weighted portfolio. Bonds and alternatives do not just reduce volatility — they reduce the severity of forced selling during downturns. This is one of the most straightforward and research-supported tools available.

Delay Social Security. Every year you delay past 62, up to age 70, permanently increases your guaranteed benefit. Maximizing Social Security reduces your dependence on portfolio withdrawals, which directly reduces sequence risk exposure.

Partial annuitization. A portion of assets converted into guaranteed income creates a floor that covers non-negotiable expenses regardless of what the market does. This separates “survival” income from “growth” assets and reduces the forced-selling problem for essential spending.

Roth conversions now. In a high-market environment, converting traditional IRA assets to Roth may be worth the tax cost, especially when conversions are coordinated with tax brackets, Medicare premium thresholds, and future required minimum distributions. When appropriate, assets with higher expected long-term growth may be prioritized for conversion first, allowing more of the future growth to occur in the Roth account tax-free. Tax-free withdrawals in a future down market do not create additional taxable income, and they do not stack on top of Social Security in a way that can trigger higher Medicare premiums.

Tax-aware withdrawal sequencing. Retirement income should be coordinated across Social Security, pensions, taxable accounts, IRAs, Roth accounts, and required minimum distributions. The goal is not simply to minimize taxes in one year, but to manage lifetime taxes, preserve flexibility, and avoid unnecessary tax surprises during retirement.

The Conversation Worth Having Right Now

A high market is actually the ideal time to stress-test a retirement plan.

Clients feel wealthy. Their accounts look strong. That psychological security makes them genuinely receptive to protective strategies — in a way they often aren’t when markets have already dropped and fear has taken over.

That window may be narrowing. With the S&P 500 already pulling back and volatility picking up in 2026, some clients who retired recently are living through sequence risk in real time without a plan to manage it.

Walk through what a 20–30% drawdown in year one would actually do to their projected plan. Show the sequence-adjusted outcomes, not just the smooth average-return projections. Then show how the strategies above change that picture.

This isn’t about being pessimistic. It’s about making sure the retirement you’ve worked decades to build can survive the full range of what markets are capable of delivering — not just the scenario where everything goes right.

Ready to Stress-Test Your Retirement Plan?

At Sona Wealth Advisors, we work with business owners and retirees to build plans that don’t just look good on paper — they hold up when markets don’t cooperate.

If you’re within 5–10 years of retirement and haven’t modeled sequence of return risk into your plan, now is the time.

​Schedule a conversation →​

Sona Wealth Advisors is a registered investment adviser based in Edina, Minnesota. This post is for informational purposes only and does not constitute financial, legal, or tax advice. Past performance is not indicative of future results. The Morningstar research referenced is from publicly available publications.

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Sona Wealth Advisors is a registered investment adviser based in Edina, Minnesota, serving business owners navigating retirement planning and wealth strategy. This post is for informational purposes only and does not constitute financial, legal, or tax advice.

Mark Struthers, CFA, CFP®, CEPA, RMA®

For current clients looking for a meeting:

This commentary is provided for general information purposes only, should not be construed as investment, tax, or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable, but is not guaranteed.