The First 5 Years of Retirement Can Make or Break Your Nest Egg - Especially Under Trump

You may have worked carefully to reach your retirement goals, but in the current environment, sequence-of-returns risk is heightened and might erode your savings. Thanks to the sequence-of-returns risk, two retirees with identical average returns might end up in completely different positions depending on when bad market years arrive. If the market has a few bad years early on in your retirement, it may quickly undo all of your investment efforts.

Here's what you should know about this risk, why it's extra concerning in today's environment, and what you might want to do to protect your retirement savings.

How the sequence-of-return risk works

Let's say that two retirees have saved identical amounts of money for retirement, and they experience identical average returns on their investments. Person A encounters a severe market downturn in their first five to 10 years of retirement. Because they're withdrawing from their retirement savings when the markets are significantly down, their withdrawals eat deeply into their savings, and their investments aren't ever able to fully recover during their remaining retirement years.

Person B experiences a thriving market during their first few years of retirement. Even though they withdraw from their investments, the strong market returns help their savings continue to grow. Fifteen years later, if the market takes a severe downturn, that person's investments are only minimally affected because the downturn happened later on in their retirement.

The math behind the sequence-of-return risk

The issue occurs because if a retiree must withdraw from a failing portfolio, they sell more of their shares at lower prices. As a result, their base funds permanently shrink, and there's less money there to retire when the market improves. Though an individual who is still working or who is near retirement might have the option to avoid selling their stocks during a downturn, someone who is retired and who relies on that money must sell the stocks, even at a significant loss, and their retirement funds may not ever recover from that financial hit.

This risk is concentrated in the first years of retirement, and it fades afterward. Though this risk is always present, the current environment has sharpened it, meaning retirees and near-retirees should be aware of how the economy could impact their retirement savings.

The factors driving up costs for retirees

Retirees currently face unusually high prices. Tariffs have driven up retail prices of imported goods, contributing to higher consumer prices. The war with Iran has caused energy prices to surge, and according to Axios, U.S. consumers had paid $100 billion in higher energy prices by early September. Living costs more for retirees, and to cope with these higher prices, retirees may have to withdraw more money from their savings.

The decreased financial support for retirees

At the same time, some types of financial support available to retirees are declining. On December 31, 2025, the Affordable Care Act (ACA) Marketplace's enhanced premium tax credits expired. The expiration of those credits means that near-retirees are paying higher rates for health insurance.

The Social Security Trustees' 2026 report projected that the Old-Age and Survivors Insurance (OASI) Trust Fund may be depleted by the fourth quarter of 2032. If the fund becomes depleted, the Social Security program may only be able to pay 78% of total scheduled benefits, meaning benefits might be reduced by about 22%.

The loss of these financial supports could leave retirees with even greater expenses, further prompting them to rely on their retirement savings. If retirees have to heavily withdraw from their portfolios in the first few years of retirement, their sequence-of-return risk could be enhanced if the market also takes a downturn.

Household wealth

Some retirees may be able to navigate with less risk, depending on their financial situation. According to Federal Reserve data released in September, the U.S. household net worth climbed $12.8 trillion in the second quarter of 2026, reaching $195.9 trillion. That said, wealth isn't distributed evenly, so some retirees may be much more financially stable than others.

Preparing for sequence-of-return risk

There are several ways near-retirees may be able to protect themselves from sequence-of-return risk. Building a buffer of cash and short-term bonds may allow a retiree to live off of these savings during a market downturn, leaving their investments untouched so they have time to recover. Retirees may want to save a year's worth of expenses in cash, and two to four years of expenses in bonds.

Withdrawal flexibility may also help protect investments during a market downturn. A retiree may want to reduce their withdrawal amounts to preserve their investments as much as possible. Additionally, retirees may want to avoid making large, irreversible purchases early on in their retirement. Keeping cash accessible and avoiding large expenses, like a mortgage, gives them more flexibility in their investment withdrawals.

Delaying claiming Social Security may also help; individuals who delay claiming their benefits past retirement age may receive a higher benefit amount of up to 8% for each full year they delay claiming benefits. That benefit increase is capped at age 70, but the higher benefits may reduce a retiree's dependence on their investments.

Bottom line

Understanding sequence-of-return risk may help near-retirees to strategically prepare for retirement. Given the higher costs that retirees currently face, many may depend more heavily on investment withdrawals, meaning a market downturn could potentially take a toll on their savings.

If you have questions about your retirement strategy, consider speaking with a financial planner. A financial expert may provide personalized advice for your situation that might help prevent you from making expensive financial mistakes.

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