Early Downturns Can Drain $400,000 From Retirement Savings

Two retirees with $1 million portfolios can finish $400,000 apart after 18 years depending on when a market decline hits, a risk Charles Schwab says retirement savers overlook.

"No investor wants to go through a market downturn or see their portfolio fall, but when you're retired or nearing retirement, it's particularly scary," said Rob Williams, Senior Wealth Management Executive and Strategist at Charles Schwab.

The Schwab Center for Financial Research modeled two hypothetical investors who retire with $1 million and take $50,000 in the first year, with 2% annual inflation adjustments thereafter. Both experience a 15% portfolio decline over two consecutive years and earn a 6% annual return in all remaining years of the 18-year simulation. The only variable is timing: one investor faces the decline in years one and two, the other in years 10 and 11. The early-loss investor depletes the entire portfolio by year 18, while the late-loss investor finishes that same span with a balance near $400,000.

The gap illustrates sequence-of-returns risk, which threatens retirees in a way that prior savings discipline cannot offset. Withdrawals during a downturn force retirees to sell shares at depressed prices, permanently shrinking the pool of assets available for any eventual recovery. Morningstar's 2026 State of Retirement Income report placed the baseline safe withdrawal rate for new retirees at 3.9%, up from 3.7% the prior year, reflecting how sequence risk compresses safe spending once withdrawals begin.

The Bucket Strategy Buys Time, Not Immunity

Schwab recommends organizing retirement savings into three time-based categories designed to give the portfolio room to recover without forcing equity sales during turbulence. The first bucket holds one year of living expenses in cash or liquid equivalents, after accounting for Social Security and other guaranteed income sources. A second bucket covers two to four years of expenses in short-term bonds, bond funds, or certificates of deposit designed to retain value in downturns. The remainder stays invested in stocks and higher-yielding instruments, where growth potential can extend savings across a retirement that may last 25 to 30 years.

The bucket structure buys the portfolio time, but Schwab's own numbers show that time buys little if withdrawals stay high. An investor who cuts withdrawals to 2% after a 15% early decline recovers the starting balance within about 11.5 consecutive years of 6% annual returns. At a 4% withdrawal rate under the same conditions, full recovery requires 28 uninterrupted years of 6% growth, the firm's research showed.

That gap points to a limit in the bucket framework. A one-year cash reserve and two-to-four years of short-term bonds cover the opening years of a downturn, but Schwab's recovery math assumes the retiree also adjusts the withdrawal rate downward. Retirees who hold the 4% rule through an early decline face a recovery horizon longer than most retirement timelines.

The First Decade Sets the Trajectory

First-decade returns explain roughly 77% of a portfolio's final retirement outcome, according to research by Wade Pfau, Ph.D, Professor of Practice at the American College of Financial Services. Independent research on withdrawal rates has reached similar conclusions. Dana Anspach, founder and CEO of Sensible Money, describes the five years before and after retirement as the "retirement red zone" for portfolios.

"The retirement red zone is generally about the first five years before retirement and the first five years of retirement where your portfolio and future outcomes are more vulnerable to big market shocks," Anspach said, speaking on Morningstar's The Long View podcast in July 2026.

Morningstar's 2026 baseline of 3.9% applies to portfolios holding 30% to 50% in equities, with heavier stock allocations lowering the safe starting rate. On a $1 million portfolio, the 3.9% baseline produces about $1,000 less annual spending than the traditional 4% rule.

Sequence-of-returns risk is not something a retiree can prevent, but three factors determine how much damage it does in the opening decade: the starting withdrawal rate, the size of the cash reserve held outside the equity portfolio, and whether spending drops after an early loss. The first 10 years of withdrawals set the trajectory. What the retiree picks as an opening rate, how much cash sits outside the equity portfolio, and whether spending drops after an early loss will decide whether the money lasts.

These figures reflect the Schwab Center for Financial Research analysis from January 2026 and Morningstar's 2026 State of Retirement Income report; readers should verify current withdrawal-rate guidance and portfolio data against the latest official announcements before making decisions.

This article is for informational purposes only and does not constitute investment or professional advice.