Two retirees can earn the same average return over a 30-year retirement, yet end up in completely different financial positions, depending on timing.
One can leave a comfortable surplus to heirs, while the other runs short of money years before reaching the end of a normal retirement. The outcome depends on whether steep declines occur during the years when the retiree withdraws money from the portfolio to cover regular monthly expenses.
Morningstar’s State of Retirement Income report calls this vulnerability sequence-of-returns risk, a timing hazard that grows more dangerous once portfolio withdrawals begin.
How withdrawal timing during a bear market erodes retirement savings
Each share sold to cover expenses during a steep decline permanently reduces the portfolio’s earning base, leaving fewer shares to generate returns when markets recover. Continued monthly withdrawals during a downturn widen that gap with each passing month.
Hartford Funds data show that bear markets have occurred roughly every 3.5 years on average since 1928. Stocks lost an average of 35% during the typical downturn, which lasted about 9.6 months across 27 declines in the S&P 500 Index since 1928, the firm reported.
Wade Pfau, professor of practice at the American College of Financial Services and founder of Retirement Researcher, estimated in his 2014 paper, The Lifetime Sequence of Returns, that the compounded return in the first 10 years of retirement explains roughly 77% of the final outcome.
Morningstar’s research raises the stakes for new retirees
Pfau, along with Michael Finke, professor of wealth management at the American College of Financial Services, and David Blanchett, head of Retirement Research at Prudential Financial, addressed on ThinkAdvisor the importance of the early retirement years. They described the five years before and after retirement as the “retirement risk zone,” when portfolio losses carry the greatest long-term weight.
Morningstar research examined what happens when steep losses arrive during the first years of retirement withdrawals.
The report found that retirees who faced poor returns in their first five years and continued spending without adjustment were significantly more likely to exhaust savings.
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The base-case safe withdrawal rate is 3.9% for new retirees holding 30% to 50% of their portfolios in equities, Morningstar noted.
That rate sits below the widely cited 4% rule because today’s elevated valuations amplify volatility during the withdrawal years that shape long-term outcomes.
The Shiller cyclically adjusted price-to-earnings ratio remained above 40 in mid-2026, a level the metric has exceeded only during the dot-com era, GuruFocus showed.
Higher starting valuations historically produce weaker early returns, compounding the sequence-of-returns risk Morningstar identified as a leading risk for new retirees facing early-year portfolio losses.
How a cash buffer keeps retirees from liquidating stocks during a downturn
Morningstar’s bucket approach to retirement portfolio planning recommends holding one to two years of portfolio withdrawals in accessible cash or short-term instruments as one approach to managing the risk.
That figure refers to the portion of expenses not already covered by Social Security, pensions, or other guaranteed income.
The key number to calculate is the monthly gap between essential expenses and guaranteed income from Social Security, pensions, or annuity payments.
A retiree with $5,000 in monthly essentials and $3,000 from guaranteed sources needs $24,000 to $48,000 in reserves to bridge one to two years without touching equities.
Morningstar also found that flexible withdrawal strategies, in which retirees temporarily reduce discretionary spending during weak markets, support higher initial spending than rigid approaches.
The report indicated that every dollar of nonessential spending deferred during a decline is a dollar the portfolio retains for the rebound.
Dana Anspach, founder and CEO of Sensible Money, told Morningstar’s “The Long View” podcast that holding enough cash to cover near-term spending removes the pressure to sell equities during a downturn and gives retirees room to adapt if conditions worsen.
<strong>I know I don’t have to adjust my spending for five years. It’s covered. I have time to make adjustments if this turns into a more prolonged bear market</strong>.
Hartford Funds data shows roughly 42% of the S&P 500’s strongest trading days over the past two decades occurred during bear markets, the firm found.
A cash buffer is what enables retirees to stay invested long enough to capture those gains, rather than locking in losses by exiting equities during the decline.
How to determine your personal exposure to sequence-of-returns risk
Morningstar’s retirement-planning research and Finke’s conference guidance outline steps retirees can follow to measure their personal exposure to sequence-of-returns risk well before the next downturn.
The first step involves totaling monthly costs that cannot be deferred, including housing, food, insurance, and healthcare. Subtracting guaranteed monthly income from Social Security, pensions, and annuities from that total reveals the portfolio-dependent spending gap.
Multiplying that gap by 12 to 24 produces the reserve figure that Morningstar recommended for maintaining equity positions through a full bear market cycle.
Comparing the result to current accessible cash and short-term holdings reveals whether the household enters the next decline with a surplus or a shortfall.
Households that complete this assessment before a bear market arrives can hold equities through volatility, Finke noted at the 2026 Morningstar Investment Conference.
