Chief Retirement Strategist Michael Conrath explains how the sequence of returns can erode retirement spending—and what can be done to mitigate the risk.

The impact of cash flow and sequence of returns on retirement savings

Market volatility is a given when it comes to investing. But fluctuation in returns from year to year can pose a significant threat to retirement spending, particularly if market downturns occur in the initial years of retirement.

Timing plays a key role

To understand sequence of return risk, consider the hypothetical example of an investment account being opened with a lump sum with no additional contributions. If the funds are left in place for 30 years, the ending balance will reflect the average annual return for the period.

However, in retirement accounts balances typically build with contributions made over many years or decades. Thus, it’s the sequence of the returns that helps determine the ending balance—as well as the quality of the retiree’s lifestyle.

Retirement accounts are especially sensitive to the timing of market ups and downs during the spending phase—and even more vulnerable to downturns that occur in the years just before and after a person retires.

Spending rates change as retirees age

Contrary to conventional wisdom, retirees' spending does not increase as time passes. Rather, their spending typically peaks in the early years, after they stop working, then tapers off as they age and slow down, according to J.P. Morgan Asset Management’s research, which analyzed the spending patterns of American households by leveraging de-identified data from more than 280,000 Chase households.¹

This finding aligns with a general view that new retirees spend on travel or other experiences, as they check off items on their bucket lists. Spending on healthcare also tends to be higher for households aged 65-plus, and those expenses typically rise faster than broad inflation.  A market downturn at this inflection point—when their accumulated wealth typically is at its greatest and withdrawals have begun—can have a long-term and devastating impact on a retiree’s life.  

Dreams realized—or derailed

Consider this hypothetical example of three retirees who are alike in many ways: they each enter retirement with savings of $1 million, earn an average annual 5% rate of return, and withdraw 4% of these funds each year (adjusted for inflation).

Their finances diverge, however, when the sequence of returns in their respective accounts is factored in. As the chart shows:   

• Retiree A (gray line) earns a steady average 5% return each year
• Retiree B (purple line) begins retirement with great returns—but has a poor rate of return in later years
• Retiree C (green line) starts retirement with poor returns but earns more positive returns in later years

As the exhibit shows, Retiree B clearly comes out ahead, with an income stream that lasts for 30 years and an ending balance that’s far higher than that of the other two. In contrast, 30 years later, Retiree A has significantly less wealth than Retiree B. And Retiree C has run out of money.

How to mitigate sequence of return risk

Plan sponsors and participants will be well served by understanding sequence of return risk and factoring it into their investment decisions. Among the many ways to help retirees avoid dollar-cost ravaging:

• Balance risk (i.e., equity exposure) at the beginning of retirement and diversify across a broad range of asset classes, which may include a mix of U.S. and international stocks, bonds and alternatives
• Consider a target date fund, with a glide path aligned to retiree spending behavior, to help balance the tradeoffs between risk and reward, while helping to fund their lifestyle and keep pace with inflation
• Adopt a dynamic spending strategy that adjusts withdrawal amounts based on market conditions; for example, withdraw less during bad markets
• Purchase an annuity with a guaranteed income feature to cover stable expenses
• Introduce in-plan retirement income solutions that offer lifetime income along with downside protection; for example, a guaranteed income feature within a target date fund

Reducing the impact of poor returns in the early years of retirement is essential for maintaining long-term spending power. By planning ahead and implementing strategies to address sequence of return risk as retirement approaches, individuals can achieve more favorable retirement outcomes.

Learn more about the sequence of returns and about how to plan for retirement in the J.P. Morgan Guide to Retirement. 

^1"Three new spending surprises," 2025, J.P. Morgan Asset Management.

Household metrics are based on internal select data from JPMorgan Chase Bank, N.A. and its affiliates (collectively “Chase”), including select Chase check, credit and debit card and electronic payment transactions from 2017–2024. Information that would have allowed identification of specific customers was removed prior to the analysis.

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TARGET DATE FUNDS. Target date funds are funds with the target date being the approximate date when investors plan to start withdrawing their money. Generally, the asset allocation of each fund will change on an annual basis with the asset allocation becoming more conservative as the fund nears the target retirement date. The principal value of the fund(s) is not guaranteed at any time, including at the target date.)

Annuity guaranteed benefits, such as guaranteed income for life are only as good as the insurance company that gives them. While it is an uncommon occurrence that the insurance companies that back these guarantees are unable to meet their obligations, it may happen.