Decades of contributions, captured employer matches, and compound growth can turn modest deposits into a serious retirement balance.
That effort cannot shield retirement savings from a threat that surfaces only after the paychecks stop, one of the retirement income challenges Schwab has flagged for pre-retirees.
The brokerage’s retirement research shows that a market decline in the first few years of withdrawals can permanently shorten the life of savings.
Two portfolios with identical long-term averages can finish decades apart in value, depending entirely on when the worst years fall relative to withdrawals.
The concept driving that gap is called sequence-of-returns risk, and it threatens retirees in a way that prior savings discipline cannot offset.
How Schwab’s modeling reveals the true cost of early market losses
In a January 2026 analysis, the Schwab Center for Financial Research modeled two hypothetical investors who retire with $1 million and take $50,000 in the first year, with 2% annual inflation adjustments thereafter.
Both experience a 15% portfolio decline over two consecutive years, and both earn a 6% annual return in all remaining years of the 18-year simulation.
The only variable is timing: one investor faces the decline in years one and two, while the other encounters it in years 10 and 11.
The early-loss investor depletes the entire portfolio by year 18, while the late-loss investor finishes that same span with a balance near $400,000, according to Schwab’s analysis.
Rob Williams, Senior Wealth Management Executive and Strategist, said market declines carry a different weight once retirement spending begins.
<strong>No investor wants to go through a market downturn or see their portfolio fall, but when you’re retired or nearing retirement, it’s particularly scary</strong>
Research shows that losses from investments can be more painful emotionally and practically when you have to live off the money soon.
Withdrawals during a downturn force retirees to sell shares at depressed prices, permanently shrinking the pool of assets available for any eventual recovery.
Schwab pairs a cash reserve with a lower withdrawal rate to prevent forced selling
The firm recommends organizing retirement savings into three time-based categories, each designed to give the portfolio room to recover without requiring equity sales during turbulence.
The first bucket holds one year of living expenses in cash or liquid equivalents, after accounting for Social Security and other guaranteed income sources.
More Charles Schwab:
- Charles Schwab, Fidelity sound alarm on Roth IRA rule
- Morgan Stanley doubles down on Schwab after earnings
- Schwab plots S&P 500 prediction markets push with Cboe
A second bucket covers two to four years of expenses in short-term bonds, bond funds, or certificates of deposit designed to retain value in downturns.
The remainder stays invested in stocks and higher-yielding instruments, where growth potential can extend savings across a retirement that may last 25 to 30 years.
The bucket structure buys the portfolio time, but Schwab’s own numbers show that time buys little if withdrawals stay high.
An investor who cuts withdrawals to 2% after a 15% early decline recovers the starting balance within about 11.5 consecutive years of 6% annual returns.
At a 4% withdrawal rate under the same conditions, full recovery requires 28 uninterrupted years of 6% growth, the firm’s research showed.
That gap points to a limit in the bucket framework. A one-year cash reserve and two-to-four years of short-term bonds cover the opening years of a downturn, but Schwab’s recovery math assumes the retiree also adjusts the withdrawal rate downward.
Retirees who hold the 4% rule through an early decline face a recovery horizon longer than most retirement timelines.
Independent research points to the same early-retirement window
First-decade returns explain roughly 77% of a portfolio’s final retirement outcome, according to research by Wade Pfau, Ph.D, Professor of Practice at the American College of Financial Services.
Independent research on withdrawal rates has reached similar conclusions.
Dana Anspach, founder and CEO of Sensible Money, describes the five years before and after retirement as the “retirement red zone” for portfolios.
“The retirement red zone is generally about the first five years before retirement and the first five years of retirement where your portfolio and future outcomes are more vulnerable to big market shocks…” Anspach said, speaking on Morningstar’s The Long View podcast in July 2026.
Morningstar’s 2026 State of Retirement Income report placed the baseline safe withdrawal rate for new retirees at 3.9%, up from 3.7% the prior year.
That figure applies to portfolios holding 30% to 50% in equities. Heavier stock allocations lower the safe starting rate.
What the sequence-of-returns warning means for your withdrawal plan
Sequence-of-returns risk is not something a retiree can prevent, but three factors determine how much damage it does in the opening decade.
The starting withdrawal rate is the first factor, with Morningstar’s 3.9% baseline on a $1 million portfolio producing about $1,000 less annual spending than the traditional 4% rule.
According to Morningstar’s report, the narrower margin reflects how sequence risk compresses safe spending once withdrawals begin.
The cash reserve is the second factor, with Schwab’s three-bucket framework using near-term cash and short-term bonds to cover the opening years of a downturn.
This approach allows retirement expenses to be funded without forcing equity sales at depressed prices, giving the portfolio time to recover.
Withdrawal flexibility is the third factor, as Schwab’s earlier recovery analysis shows the same early decline can produce two very different timelines. The outcome depends on whether spending is reduced during the downturn or remains fixed under the traditional 4% rule.
The first 10 years of withdrawals set the trajectory. What the retiree picks as an opening rate, how much cash sits outside the equity portfolio, and whether spending drops after an early loss will decide whether the money lasts.
Related: Overlooked retirement risk facing millions of savers
