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If you are planning to retire in 2027, this is the season when the date starts to feel real. Third-quarter statements have arrived, open enrollment is underway, and the conversation shifts from whether you can retire to what happens in the first year after you do.

That first stretch deserves more attention than it usually gets. Most retirement projections are built on an average annual return, and averages are useful for planning. But once you begin taking money out of a portfolio, the average stops telling the whole story. The order in which returns arrive starts to matter, and it matters most in the years right around your retirement date.

This is known as sequence-of-returns risk, and it is one of the first things we look at when a client brings us a target retirement date and asks whether the plan holds up.

Why the Order of Returns Matters Once You Start Withdrawing

While you are still saving, a market decline is uncomfortable but not necessarily damaging. You are not selling anything. If anything, contributions during a downturn buy more shares, and time is on your side.

Withdrawals reverse that dynamic. When you take money out of a portfolio that has fallen, you sell more shares to produce the same dollar amount. Those shares are gone. They are not there to participate when the market eventually recovers, which means the portfolio has to work harder from a smaller base.

This is why a decline in year one or two of retirement can leave a longer shadow than an identical decline in year fifteen. The early years are when the balance is largest and the withdrawal schedule is longest. A poor start compounds in the wrong direction.

The reverse is also true. A strong first few years can build a cushion that makes later declines much easier to absorb. Neither outcome is something anyone can predict or control, which is exactly why it belongs in the planning conversation rather than the forecasting one.

Two Portfolios, the Same Average Return, Two Different Outcomes

A simple hypothetical makes the point better than any explanation.

Imagine two retirees, each starting with $1,000,000 and withdrawing $50,000 at the beginning of every year. Both experience the same five annual returns. The only difference is the order in which those returns show up.

Same five returns. Same 5% average. About $118,000 of difference after only five years, and the gap tends to widen from there because the smaller balance has less to work with going forward.

Here is the detail that surprises people most. If neither retiree had taken any withdrawals, both portfolios would have ended at exactly the same value, roughly $1.2 million. The order of returns only creates a difference once cash is moving in or out. In retirement, that means withdrawals are what turn a sequence into a risk.

This example is hypothetical and is used for illustration only. It does not represent any specific investment, and it does not reflect taxes, fees, or inflation adjustments to the withdrawal amount. Actual results will vary.

Building a Cash Reserve or Income Buffer

The practical response to sequence risk is not to try to avoid market declines. It is to arrange things so that a decline does not force you to sell at a bad time.

That usually means holding a reserve of relatively stable assets set aside specifically to fund near-term withdrawals. When markets are down, the reserve covers spending. When markets recover, the reserve gets refilled. The portfolio gets time, which is the one thing a forced sale takes away.

A few things worth thinking through as you build one:

• How much to hold. One to three years of planned withdrawals is a range that comes up often in planning conversations. The right amount depends on your other income sources, how much of your spending is essential versus discretionary, and how comfortable you are with volatility. There is no single correct number.
• Where to hold it. The reserve should be somewhere you can access without selling into a decline and without a tax surprise. Which account it sits in matters as much as what it is invested in.
• What counts toward it. Predictable income such as Social Security or a pension already covers part of your spending. The reserve only needs to cover the gap between that income and your actual expenses, which is often smaller than people assume.
• The cost of holding it. A reserve that sits in cash will likely lag inflation over time. That is a real tradeoff, and it is the reason the reserve should be sized deliberately rather than kept as large as anxiety suggests.
• When to refill it. Decide the rule before you need it. Rebalancing after a strong period is far easier to follow than a decision made in the middle of a difficult market.

If you want to see how a reserve fits alongside Social Security, withdrawals, and other income, our retirement paycheck guide walks through how those pieces can be sequenced.

Questions Worth Answering Before Your First Withdrawal Year

If 2027 is the year, these are the questions we would want answered well before January:

• What will you actually spend in year one? Not the estimate from five years ago. The number that reflects travel, healthcare, and the early retirement years when spending often runs higher than expected.
• How much of that spending is covered by income that arrives regardless of the market, and how much has to come from the portfolio?
• Which account does the first withdrawal come from, and why? Taxable, tax-deferred, and Roth dollars carry different consequences, including effects on your tax bracket and on future Medicare income-related surcharges.
• If the market fell 20% in your first year, what would you do? A plan you can describe in advance is worth more than one you have to invent under pressure.
• Is your current allocation the one you want going into the withdrawal phase, or is it the one you drifted into during the accumulation years?
• How is healthcare covered between your retirement date and age 65, and what does coverage look like after that? Medicare decisions interact with your income plan more than most people expect.
• What happens to the plan if extended care is needed early in retirement? Long-term care planning belongs in this conversation, because care costs and market declines can arrive at the same time.

None of these require a perfect answer. They require an answer you have thought about before the first withdrawal, rather than after it.

Why the End of the Year Is a Useful Checkpoint

Fall is a natural time to run this review. Third-quarter results are in, so you are working with current numbers rather than last spring’s. Medicare’s Annual Enrollment Period runs October 15 through December 7, which puts healthcare decisions on the calendar anyway. And year-end tax planning, including Roth conversion considerations and charitable giving, is still open.

For anyone targeting a 2027 retirement date, that overlap is convenient. At McGregor Wealth Management, we would rather stress-test a plan in the quarter before someone retires than in the quarter after.

Final Thoughts

Sequence-of-returns risk is not a reason to delay retirement or to abandon growth investments. It is a reason to be deliberate about the first few years.

You cannot control what markets do in 2027. You can control how much you need to withdraw, where those withdrawals come from, how large a buffer sits between you and a forced sale, and whether you have decided in advance what a difficult first year would look like. That preparation is what keeps a normal market decline from turning into a permanent change to the plan.

If you are firming up a retirement date, you can request a complimentary consultation to review how the first five years would hold up, or find more retirement planning insights on our blog.

If you’d like to get in touch, call 303.681.0113, email mark@mgswealth.com, or schedule a meeting online.

Frequently Asked Questions

What is sequence-of-returns risk in retirement?

Sequence-of-returns risk is the risk that the order of investment returns, rather than the average return, works against a portfolio you are withdrawing from. Poor returns early in retirement can be more damaging than the same returns later, because withdrawals during a decline require selling more shares, leaving fewer invested when markets recover. Two retirees with identical average returns can end up with very different balances depending on when the good and bad years arrived. This is one of the reasons early retirement years receive extra attention in the planning work we do at McGregor Wealth Management.

How large should a retirement cash reserve be?

There is no universal figure. One to three years of planned portfolio withdrawals is a range that appears frequently in planning discussions, but the appropriate amount depends on how much of your spending is already covered by Social Security, a pension, or other predictable income, how much of your budget is essential versus discretionary, and your own comfort with market volatility. Holding too little can force sales during a downturn, while holding too much can cost purchasing power over a long retirement. The size of the reserve should be a deliberate decision reviewed as circumstances change.

Does sequence-of-returns risk go away later in retirement?

It becomes less significant over time, though it does not disappear entirely. The risk is greatest when the portfolio balance is at its largest and the remaining withdrawal schedule is at its longest, which is typically the years just before and just after retirement. As retirement progresses and the remaining time horizon shortens, a market decline has fewer future withdrawals to affect. That is why the transition years tend to receive the most planning attention.

About Mark

You probably have people helping with your investments, legal matters, and taxes…but who makes sure you are getting all the benefits you’re owed? I do. My name is Mark McGregor. I scour federal, state, local, and corporate databases to find benefits you are owed but NOT receiving. That’s what I do. Yes, we do all the other things as well, such as providing investment management, tax planning, long-term care planning and other services. Those are the big things, but I also help to make sure the little unknown things are taken care of for you. It’s also making sure that the little things don’t become big problems for you down the road.

I got into this business to fill a void I noticed after the passing of one of my friends’ parents who was experiencing hardship due to poor planning. I saw the issues they had to deal with firsthand, and this left me feeling that there were lots of financial salespeople, but not many true advisors making sure people were getting all the available benefits they had worked so hard for.

I use the skills I gained from my bachelor’s degree from California Polytechnic State University and 24 years of industry experience to get all the benefits my clients are owed. I live in Castle Rock, and we are actively involved in sports and charitable organizations, such as Unbound, which provides personal attention and direct benefits to children, youth, the aging, and their families so they may live with dignity and achieve their desired potential and participate fully in society.

Disclaimer: Investment advisory services are offered through Retirement Wealth Advisors, Inc., an SEC-registered investment adviser. McGregor Wealth Management and Retirement Wealth Advisors are not affiliated. Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss during periods of declining values. Past performance does not guarantee future results. This material is provided for general informational and educational purposes and is not intended as individualized investment, tax or legal advice. McGregor Wealth Management and its affiliates do not provide legal or tax advice. Consult an appropriate financial professional, tax advisor or attorney regarding your individual circumstances. Insurance and annuity guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. Mark McGregor and/or McGregor Wealth Management are not affiliated with or endorsed by the Social Security Administration or any other government agency.