How does Ritholtz Wealth Management view sequence of returns risk in retirement?

Our average return decides how long the money lasts

That belief holds only while no money leaves the portfolio. With no withdrawals, $1.1M × 0.80 × 1.10 × 1.10 = $1,064,800 in either order. Once Ramon and Yolanda need spending money, the first bad year has less capital left to recover. Ritholtz Wealth Management sets the withdrawal schedule at the same time as the allocation, because the two are one decision.

For illustration, Ramon, 61, and Yolanda, 59, read their year-end statements and find $1.1M across his 401(k), two IRAs, and a $200K brokerage account. He is a civil engineer; she is a retired chemistry teacher with a small state pension. They plan to draw $55K at the start of each year from age 62. In Order A, returns are −20%, then +10%, then +10%: ($1.1M − $55K) × 0.80 = $836K; ($836K − $55K) × 1.10 = $859.1K; ($859.1K − $55K) × 1.10 = $884.5K.

Order B uses the identical returns in reverse: $1.045M × 1.10 = $1.1495M; ($1.1495M − $55K) × 1.10 = $1.204M; ($1.204M − $55K) × 0.80 = $919.2K. The three-year difference is $34.7K, caused by order alone. The site’s calculator can run the same arithmetic with your own withdrawal amount and account balance.

In Order A, they sold $55K of shares after the 20% fall. A 20% loss needs a 25% gain merely to return to even. Distributions from the 401(k) and traditional IRAs also count as ordinary income in the year received, so taxes are still owed when the sale lands at a bad time. Every holding can fall in value, including money you originally invested.

The reserve is smaller than the portfolio

Waiting changes the shares sold

Sequence risk is over once we get past year one

Sequence risk usually runs through the first five to ten withdrawal years, because an early loss shrinks the base that every later draw depends on. Ramon plans to delay Social Security, so ages 62 through 70 are his exposed stretch. A 20% drop in year 20 still hurts, but it hits a portfolio with far fewer years left to fund. Ritholtz Wealth Management maps this window first, then sets how much stock the paycheck can carry.

Cash in the IRA is just dead money

Yes, the buffer usually gives up return when early markets are good. If cash trails stocks by 3 percentage points a year, for illustration, $110K gives up about $3,300 a year in Order B. It earns its keep only in Order A, and nobody gets advance notice of that order. Ritholtz Wealth Management holds the reserve because research shows the damage from early withdrawals after losses, not because anyone can forecast next year’s market.

What age should the buffer be ready, and what is due each year?

For anyone five years or less from the last paycheck, the buffer should be in place before that paycheck stops. Ramon should build $110K by age 62, which equals two $55K draws after Yolanda's pension. Keep it in the 401(k) or IRAs, where building the reserve does not create brokerage gains, and refill it only after stocks finish an up year.

The IRS due dates make the cash bucket useful for taxes too, so a quarterly payment never forces a stock sale at a bad moment.

Ramon and Yolanda should first total the withdrawals their portfolio must cover after Yolanda’s pension. Next, they should identify which funds in the 401(k) and IRAs can hold cash or short-term bonds, and make the change while Ramon is still working. Then they should write the refill instruction next to the withdrawal plan. A verbal promise to “deal with it later” tends to disappear around the time the first paycheck stops.

Waiting to build the cash reserve until after the first market drop creates a measurable loss of flexibility. At 61, with stocks up, $110K of reserve costs $110K of shares. After a 20% decline, it costs shares that were worth $137.5K ($110K ÷ 0.80), so $27.5K more of the portfolio was sold at the low point, while tax on IRA distributions remains due.

Gather the paperwork before moving money. The summary plan description is often where a 401(k) reveals whether partial withdrawals after employment are allowed and whether each withdrawal comes out pro rata across funds. Ritholtz Wealth Management also reviews the brokerage cost basis report before a sale, since tax lots can make one sale quite different from another.

The calendar shows why a cash reserve needs room for tax payments as well as living expenses. Federal tax due dates cluster in April, June, September, and January, so estimated payments should come from the cash bucket rather than a stock sale.

Paperwork that answers the real questions

Two similar balances, different reserves

• 401(k) statement and summary plan description: Check partial-withdrawal and pro-rata rules.
• IRA statements: Download current balances from each custodian.
• Brokerage cost basis report: Find unrealized gains on the custodian’s account page.
• Pension benefit letter: Confirm Yolanda’s monthly payment and start date.
• Social Security statements: Download both estimates from the SSA at ssa.gov.

Work you can run alone, and what to bring to Ritholtz Wealth Management

You can run both return orders in a spreadsheet, collect the paperwork, and write a refill instruction. Deciding where the reserve sits across a 401(k), two IRAs, and a brokerage account, while gap-year Roth conversion strategy and two Social Security claiming dates affect the same years, is worth a first conversation with Ritholtz Wealth Management.