I’m Begging You to Think About This Now
If the market drops 50%, like it did between May 2008 and March 2009, your investments do not just take a hit. A crash that size can take your entire financial independence timeline down with it.
This is not a prediction that a crash is coming tomorrow. Nobody knows when the next one hits. This is not about fear.
It is about preparation, and specifically about something called sequence of returns risk.
If you are 35 or younger, a crash does not threaten you nearly as much as someone a year away from retirement. But if you are close to financial independence, whether retiring early or at a standard age, this is the risk that deserves your attention first.
📺 Watch the full video above — I run the actual crash simulation on screen using my own retirement calculator.
Click here to grab the Google Sheet I talk about too.
What Sequence of Returns Risk Actually Means
Take two people who both retire with $1 million. The first retires in 2006. The second retires in 2008, right as the market starts falling.
Both are fully invested in the S&P 500 with dividends reinvested. Same starting balance. Same withdrawal plan.
| Retired 2006 | Retired 2008 (crash year) | |
| Starting balance | $1,000,000 | $1,000,000 |
| Balance after year 1 | $1,100,000 | $648,000 |
Same $1 million start. Two completely different experiences in year one, purely based on the year they happened to retire.
The lesson is not that you go broke. It’s that you spend your first several years of retirement with less than half the cushion you expected, and every spending decision carries extra stress.
Even when the 30-year math eventually works out on paper, modeling this risk before you retire is what turns an abstract worry into an actual plan.
How to Actually Simulate This
Modeling sequence of returns risk in theory is useful. Simulating it directly against your own numbers is better.
Here is how to stress-test your own plan using a free calculator: pick your retirement age, your portfolio size, and your first-year withdrawal amount. Assume a standard growth rate and inflation adjustment for most years.
Then pick one year, ideally within your first decade of retirement, and simulate a 30-33% drop instead of the standard 10% growth assumption.
A portfolio that looks fine growing at a steady 10% a year can fall apart if a 33% down year lands early. The same starting balance, the same withdrawal rate, produces a completely different 30-year outcome depending purely on when the bad year hits.
Two bad years landing within the first decade, even with everything else averaging out to a normal 10% return, can be the difference between a portfolio that lasts 30+ years and one that runs out in your mid-70s.
The Math Behind Why This Is Guaranteed to Happen
Here is what makes this worth planning for rather than worrying about.
| Metric | Value |
| Bear markets since 1928 (S&P 500) | 27 |
| Average frequency | Roughly every 3.5 years |
| Typical decline | ~35% |
| Typical duration before recovery begins | 9 to 10 months |
| Odds of a 30-year retirement avoiding one entirely | Effectively zero |
Source: Hartford Funds, Ned Davis Research.
If you are planning for a 30-year retirement or longer, you are not going to avoid a bear market. You are guaranteed to live through several. The only real question is whether one lands in your first decade of withdrawals, and whether your plan already assumed it might.
The Moat: A Three-Bucket Strategy
This is the core defense against sequence of returns risk, whether you are already retired or approaching it within five years.
| Bucket | Holds | Purpose |
| Bucket 1 | 1 year of expenses in a high-yield savings account | Immediate cash need. Never has to be sold during a downturn. |
| Bucket 2 | 2-10 years of expenses in short-term bonds, CDs, or dividend stocks | Steady return that beats inflation without full market exposure. |
| Bucket 3 | Year 11+ of expenses, fully invested | Long time horizon means market drops have time to recover before this money is needed. |
Your risk tolerance determines how much lives in each bucket. Some people only want 1-3 years in cash and bonds combined. Others want the full 1-2 years in cash plus 3-10 years in bonds, dividends, or CDs before anything stays fully invested.
If the market crashes while you are in a downturn, the two safer buckets fund your expenses while the market recovers. You never have to sell invested shares at the bottom just to cover this month’s bills.
Six Things to Do About Sequence of Returns Risk Today
| # | Action |
| 1 | Know your sequence risk window: roughly the 5 years before you stop working and the 5 years after. If you’re in or near that window, run your own numbers through a crash scenario now. |
| 2 | Build a cash and short-term bond buffer sized to 1-3 years of expenses. Not your whole portfolio — just the piece you’d draw from in a downturn instead of selling stocks at the bottom. |
| 3 | Use the guardrails approach instead of a fixed withdrawal number. Good year: small raise in spending. Bad year, especially early: cut spending a little instead of pulling a fixed dollar amount regardless. |
| 4 | If using the Rule of 55, remember it removes the tax penalty only. It does not protect against market volatility. Everything here applies just as much, maybe more, if you’re accessing funds before 59.5. |
| 5 | Don’t try to predict the crash. Missing just the 10 best market days over 20 years cuts long-term returns dramatically, and some of the best days happen right after the worst ones. |
| 6 | Set your rebalancing and spending rules in writing before you need them. The people who panic-sell in a real crash are almost always the people who never decided in advance what they’d do. |
📊 Stress-Test Your Own Retirement Number
The free Coast FI Calculator lets you simulate a market crash against your own retirement age and portfolio size, the same way I demonstrated in the video above.
â–º Transaction Register — $15.99
The Bottom Line
Sequence of returns risk does not care how disciplined your saving was or how well your portfolio has performed on average. It cares specifically about the order the returns arrive in, especially in the five years before and after you stop working.
You cannot predict or prevent a bear market. You can absolutely prepare for one, with a cash buffer, a flexible withdrawal approach, and rules written down before you ever need them.
If a crash never lands during your critical window, that is the outcome you were hoping for. If it does, you will already have the moat built. Do you think we’re headed for a 30% correction in the next year or two? Drop your take in the comments on the video. And if you’re planning to access funds before 59 and a half, read this next since sequence of returns risk related to the Rule of 55.