Looking to retire? Wondering how to time your exit in today’s volatile market? Let’s start with a little history lesson. When Chancellor Otto von Bismarck introduced the world’s first state pension system, retirement wasn’t exactly the extended chapter of life we know today. The retirement age was set at 70, while the average German man lived to about 72. Most people didn’t live long enough to enjoy much retirement at all – it was merely a brief “sunset of life” funded by younger workers. Fast forward to today: average life expectancy is pushing 80+, and many people retire in their early 60s. We’re now facing 20, 30, even 35 years of retirement – a whole extra chapter of life that Bismarck never even saw coming. And with this new chapter comes new challenges, because as it turns out, retirement isn’t just a permanent vacation of golf and grandchildren.
1. Sequence of Returns Risk
Have you ever heard the saying, “Timing is everything”? When it comes to retirement planning, this couldn’t be more true. Most retirees are familiar with the famous “4% rule” – the traditional guideline that suggests you can withdraw 4% of your initial retirement savings each year (adjusted for inflation) and your money should last 30 years. It’s been the gold standard of retirement planning since the 1990s.
However, even this tried-and-true 4% rule can fall apart depending on when you retire. We call this the “sequence of returns risk” – a fancy term for something actually simple: the risk of when bad market returns happen. If the market tanks early in your retirement while you’re making those 4% withdrawals, it can knock your entire plan off course and even threaten your retirement savings.
Let’s look at just how dramatic this impact can be. We take three hypothetical retirees—Thomas, Martha, and Robert—who retired in 1995, 2000, and 2003, respectively. Each started with the same $1 million portfolio and followed identical withdrawal strategies. The difference in outcomes? Nothing short of staggering.
The Power of Retirement Timing: Portfolio Value Over Time
| Time Period | Thomas (1995) | Martha (2000) | Robert (2003) |
|---|---|---|---|
| After 10 Years | $1,680,000 | $640,000 | $960,000 |
| After 20 Years | $1,450,000 | $320,000 | $850,000 |
| After 30 Years | $1,250,000 | $0 | $700,000 |
For visual purposes only. Simplified for the purposes of this article; your real life results will vary. Always consult with a financial and tax professional for advice.
The Story Behind the Numbers
Let me break down what’s happening here:
Thomas (1995 Retiree): The Fortunate Timer
Thomas retired in 1995 with $1 million, just before one of the strongest bull markets in history. For his first five retirement years, the S&P 500 returned 34%, 20%, 31%, 27%, and 20% annually! By 2000, his portfolio had more than doubled to about $2.2 million, even after withdrawals.
This tremendous head start created a cushion that helped him weather the subsequent dot-com crash and 2008 financial crisis. After 30 years, despite taking withdrawals throughout, Thomas still has $1.25 million – more than his starting amount!
Martha (2000 Retiree): The Unlucky Timer
Martha retired in January 2000 with the same $1 million, but her timing couldn’t have been worse. The market immediately dropped for three consecutive years (-10%, -13%, -23%). Instead of growing in those crucial early years, her portfolio shrank to around $540,000 by the end of 2002.
When the 2008 crisis hit, her already-diminished portfolio took another huge hit. After 30 years, Martha’s money ran out completely, despite following the exact same 4% withdrawal strategy as Thomas.
Robert (2003 Retiree): The Patient Waiter
Seeing the writing on the wall, Robert postponed retirement until 2003, after the worst of the dot-com crash. Starting with $1 million, his first year saw a 26% gain rather than losses. This positive start, despite later facing the 2008 financial crisis, meant his portfolio still had $700,000 remaining after 30 years.
The Million-Dollar Lesson
What’s mind-blowing here isn’t just the different outcomes – it’s that just a few years’ difference in retirement timing created over a million-dollar gap between Thomas and Martha after 30 years, despite identical investment strategies and withdrawal rates.
Sequence of returns risk is sneaky because average returns can look fine on paper, but the order of those returns matters when you’re withdrawing funds. A long-term average of, say, 6% a year is great – but not if the first couple of years are –20% and –15%. Recovering from a bad start while taking withdrawals is like trying to fill a bucket that has a hole in it.
So, what do we do about this? One approach is to be flexible with withdrawals or have a cushion for bad years. Another approach is portfolio design – maybe keeping a bit more in cash or bonds to avoid selling stocks at a depressed price early on.
2. Longevity Risk
Okay, this one sounds odd – how can living a long time be a risk? Isn’t that a good thing? Of course it is! But financially, longevity risk is the chance that you live so long that you outlive your money. And given modern medicine and healthier lifestyles, this is a real concern. Bismarck probably never imagined a 30-plus-year retirement would be common. Yet here we are.
Let’s throw some numbers around. If you’re 65 and married, there’s about a 50/50 chance one of you lives to 90. And roughly a 20% chance one of you makes it to 95. Overall, those odds are way higher than many would assume. Some of you reading this will spend almost as many years retired as you did working!
What does a longer life mean? Well, it means your savings need to last longer, your investments need to keep growing further into your retirement, and you have to plan for more years of expenses. Planning for a 15-year retirement vs. a 30-year retirement is a totally different ballgame. And you don’t even know which one you’ll have! However, as long-term wealth builders, we prefer to err on the side of caution. It’s much better to have money left over at 95 (to spoil the great-grandkids or donate) than to be 95 and worrying if you can afford your prescription medications next month.
What Are Your Chances of Reaching Old Age?
Running out of money at 85 or 95 is a scary thought. It means maybe relying on family or cutting your standard of living drastically. To tackle this, we consider things like lifetime income solutions (annuities, pensions), spending adjustments over time, and investing part of the portfolio for growth even in retirement (you probably can’t go 100% ultra-conservative at 65 if you might need to fund 30+ years). The bottom line: plan for a long life.
3. Medical Cost Surprises (and Health Shocks)
Retirement might be “when the work ends,” but unfortunately, it’s often when medical issues begin (or accelerate). I don’t want to be a downer – many people stay healthy well into their 80s – but health care costs tend to go up as we age, and medical issues can crop up out of nowhere.
This risk has two parts: higher-than-expected medical and long-term care costs, and the possibility of retiring earlier than planned due to health.
First, the cost part. Quick quiz: What do you think an average 65-year-old couple might need to cover out-of-pocket health care expenses in retirement? A few tens of thousands? Maybe $100k? Try several hundred thousand. One analysis found that a 65-year-old man today needs around $191,000 in savings just to have a 90% chance of covering his health care costs in retirement. For a 65-year-old woman (who typically lives longer), the number is about $226,000. And that’s with Medicare in the picture!
Now the second part: Many people intend to work until 65 or beyond, but life sometimes has other plans. A lot of folks end up retiring earlier than expected, often because of health issues. In fact, in a 2024 survey, 58% of retirees said they left the workforce earlier than they initially planned. And the number one reason? You guessed it: health problems or disability, cited by 38% of those early retirees. (The second most common reason was changes at their company, like layoffs, at 23%.
But health was the big one.) This means a huge chunk of people aren’t getting those extra peak earning years to save more – instead, they’re facing medical bills and living on their savings sooner than expected. Retiring at 62 instead of 66 might sound like only four years difference, but that could mean four more years drawing down savings and four fewer years contributing to 401(k)s or waiting for Social Security credits. It’s a double whammy.
4. Taxes – Uncle Sam Wants His
Tax risk in retirement refers to the uncertainty of future tax policies and the impact of taxes on your retirement income. Even after you stop working, taxes don’t disappear – withdrawals from tax-deferred accounts, Social Security benefits, pensions, and investment income may all be taxable. Changes in tax laws or higher rates in the future could significantly affect net retirement income.
Tax Rates: Historically Low… and Maybe Staying That Way?
Here’s the thing — even with all the noise in the news, one reality often catches people off guard: tax rates right now are still at historically low levels.
Like, really low.
Back in the day (and I’m talking post-WWII into the 1970s), the top federal income tax rate was… 94%. That’s not a typo. You made a buck, Uncle Sam took almost all of it (if you were wealthy). Through the 60s and 70s? Still over 70%. It wasn’t until the Reagan years that top rates started coming down hard, and we’ve mostly been trending downward ever since.
Top Tax Rate on Individual Income, 1913-2025
Note:
This chart contains simplifications and ignores certain factors, such as the maximum tax on earned income of 50% when the top rate was 70% and income-related reductions in itemized deductions. It doesn't reflect the changing percentage of returns subject to the top rate.
Sources: Eugene Steuerle, The Urban Institute; Joint Committee on Taxation; Joseph Pechman, Federal Tax Policy, 1987, Appendix Table A-1, obtained from: www.urban.org/sites/default/files/publication/59856/1000459-A-Brief-History-of-the-Top-Tax-Rate.PDF and updated with recent data.
So if you’re feeling the tax pinch today… just remember, this is the least pinch we’ve had in generations.
Now let’s talk about what could be coming.
TCJA: Possibly Extended… for Now
The Tax Cuts and Jobs Act, originally passed in 2017, was set to expire after 2025. That meant rates were scheduled to jump back up — the 22% and 24% brackets would revert to 25% and 28%, and the top rate would head back to 39.6%.
But now it’s 2025, Trump is back in the White House, and he’s more likely to extend those tax cuts than if another candidate had won the presidency. In other words, these lower TCJA-era rates appear positioned to remain in effect for the foreseeable future.
Probably.
But we don’t like to plan your retirement around “probably.”
Because tax policy is like the weather in Washington: one political season, and everything changes. If the administration flips again in 2028, if Congress shifts, if deficits climb, if public pressure mounts to “tax the rich” or “protect Social Security” or whatever the issue of the week is — tax rates could spike.
Not overnight, maybe. But fast enough to throw your carefully planned retirement income strategy out of whack.
Keep in mind that much of your retirement savings are likely in tax-deferred accounts. Your traditional IRA, your 401(k), that SEP or SIMPLE plan — it all comes out as ordinary taxable income when you use it. Even your Social Security benefits can get taxed if your income is too high. That’s why we should consider Roth accounts.
But what if I convert to Roth now, and taxes go even lower?
Yes, that could happen. But ask yourself — what gives you more confidence:
Paying known tax rates now and locking in tax-free growth for life?
or
Betting on Washington to stay predictable for the next 30 years?
We’re not just planning for 2025. We’re planning for 2035. And 2045. And possibly for your kids and grandkids after that. The more you control now — by diversifying your tax buckets, timing your withdrawals, and possibly converting to Roth — the less vulnerable your retirement plans become to political shifts in Washington.
5. Inflation – The Stealthy Thief
Finally, let’s talk about inflation. In the last couple of years, this one has been front-page news (hello, 40-year high inflation, we did not miss you). But inflation is not just a recent phenomenon to worry about for a year or two – it’s a constant, creeping risk over a long retirement. Simply put, inflation means the cost of living rises over time, and each dollar buys a little less each year. Even “low” inflation, say 2-3% per year, really adds up when compounded over 20 or 30 years.
Let me put this in perspective with an example: If you retired in 1996 needing $50,000 a year to live on, by 2021 you’d need almost $90,000 a year to afford the same lifestyle. Why? Because even though inflation averaged only about 2.4% in that period (pretty mild), over 25 years that eroded the dollar’s value so much that $1 in 1996 was like roughly $0.57 by 2021.
Inflation: The Stealthy Thief of Retirement
What $50,000 needs to grow to over 25 years (USA)
(avg. 5.9% inflation 1965‑1990)
(avg. 2.4% inflation 1996‑2021)
This chart shows how much money you'd need over time to maintain the same purchasing power as $50,000 today.
Sources: Bureau of Labor Statistics, Historical CPI‑U.
Now consider a worse scenario: say you retired in 1965, a period when inflation was much higher (think late ’60s and 1970s). A $50,000 income in 1965 had to grow to $210,000 by 1990 to maintain the same purchasing power. That era saw inflation average nearly 10% a year – a nightmare for retirees living on fixed incomes. Basically, in high-inflation times, prices can double in a decade or less.
Many retirees remember the 1970s inflation or heard stories from their parents, but after decades of relatively tame inflation, it’s easy to get complacent. Then 2021-2022 hit, and we suddenly saw ~7% inflation in 2021 and over 9% by mid-2022 – the highest in 40 years. That was a wake-up call. Gas, groceries, healthcare, you name it – everything got more expensive quickly. Social Security does adjust for inflation (COLA increases), which is helpful, but if only part of your income is inflation-adjusted, the rest of your portfolio needs to pick up the slack.
In Conclusion
I know this is a lot to take in. If your head is spinning with all these risks – sequence what? longevity who? – take a deep breath. The fact that you’re reading about these hidden retirement risks means you’re already ahead of most folks, who unfortunately might not consider them until it’s too late. My goal isn’t to scare you (okay, maybe just enough to inspire action), but to empower you.
As a financial advisor (and someone who genuinely loses sleep thinking about this stuff so you don’t have to), I’m here to help chart the course. With the right strategies, we can mitigate these risks – maybe not eliminate them (I’m no magician), but definitely manage them so you can sleep at night and increase the chances of enjoying your retirement as you deserve.
Ready to talk more about your own plan? I’m all ears. Feel free to click the button below to schedule an appointment with me.
