Avoiding Sequence Risk: When and How Clients Should Draw From Fixed Income First

A market downturn early in retirement can permanently damage a nest egg. This danger is known as sequence of returns risk. For most retirees, the primary goal is not maximizing wealth but maintaining a comfortable lifestyle without outliving their money.

Managing this risk requires an ongoing, adaptive approach. Financial planning should never sit on autopilot. Circumstances change, and rigid strategies can fail during volatile periods.

Advisors can mitigate this vulnerability by tailoring a withdrawal plan. Implementing a bucket strategy helps shield a client’s growth engine and prevents emotional, ill-timed liquidations at market bottoms. For specific clients, tools like annuities or cash value life insurance provide reliable, non-correlated income.

Why Sequence Risk Is So Damaging

The shift from saving money to spending it is the most fragile financial period a client will face. When a market drop happens right at the start of retirement, systematic withdrawals become brutal. Taking distributions from a retirement portfolio that is losing value permanently reduces the portfolio’s principal.

Selling shares at a loss leaves fewer shares in the account. This math prevents the portfolio from fully participating in a market recovery, accelerating the path to running out of money.

Morningstar research indicates that two retirement portfolios can average the exact same return over 30 years. Yet, one portfolio can run out of money more than a decade sooner based entirely on the timing of early market losses.

Why Early Withdrawals From Equities Can Do Lasting Damage

Selling depressed growth assets to fund immediate cash needs liquidates shares at the worst possible time. This locks in temporary paper losses and turns them into a permanent impairment of principal, which accelerates portfolio depletion, severely crippling the capacity for recovery.

“It’s like trying to catch the falling knife,” said Benjamin M. Howarth, CASL®, RICP®, a financial advisor and Special Care Planner. “The bigger the percentage you take out, the lower probability of success that money’s going to last you throughout your retirement.”

Fixed Income as a Retirement Timing Buffer

To insulate a portfolio from early sequence risk, advisors must look beyond traditional asset allocation. Implementing an intentional withdrawal sequencing framework creates a structural barrier between immediate cash flow needs and short-term equity volatility. 

Rather than an emergency fallback, this sequencing functions as a continuous operational loop.

“It’s not necessarily, when do I switch approaches and say, ‘Hey, I’m just going to use the fixed money approach.’ It’s more I’m using that approach all the time,” Howarth said.

When equities drop, drawing from cash reserves, short-duration bonds, or stable-value funds provides the necessary liquidity. This prevents advisors from forcing the liquidation of growth capital at a cyclical bottom, allowing risk assets to remain intact to capture the full upside of an eventual recovery.

When To Prioritize Fixed-Income Withdrawals

The primary window for this strategy is the “Retirement Red Zone”—a concept popularized by Prudential Financial—or “fragile decade.” These are the two five-year periods right before and after retirement when sequence risk peaks.

“The way I correlate retirement, it’s a lot like mountain climbing,” says Howarth. “The goal is not to get to the top, it’s to get back down to the bottom alive. Same with retirement—it’s not to get retired, it’s to make sure your assets last as long as you do.”

During market drops, prioritizing fixed-income liquidations protects the underlying equity principal from permanent harm. This strategy uses a multi-year cash or short-duration bond buffer to absorb shocks. Leaning on fixed income during these stress periods ensures predictable income while buying time for growth assets to recover.

Limits and Tradeoffs of Fixed-Income-First Drawdowns

A fixed-income-first drawdown strategy is not a permanent solution. Aggressive use introduces severe tradeoffs. Avoiding equities during long bull markets creates massive opportunity costs and cash drag. 

According to Vanguard, the strategy must remain a temporary timing buffer rather than an asset allocation pivot. 

Balancing this timing buffer with broad sustainability guardrails is critical. Morningstar’s research establishes that while a fixed-income buffer mitigates early sequence risk, advisors must strictly coordinate liquidations with long-term inflation adjustments. Without this discipline, the liquid cushion can be prematurely exhausted.

Structuring a Smarter Withdrawal Sequence

A steady withdrawal plan builds a clear, multi-step income stream. Instead of treating fixed assets as an emergency fund, advisors divide a portfolio into two clear roles: short-term spending and long-term growth. 

Safer investments serve as the first layer for cash flow, using cash reserves, short-duration bonds, or bond ladders. This bucket can also be backed up by annuities to guarantee an income floor.

Vanguard research supports this systematic approach. Choosing the right order of withdrawals across taxable and tax-deferred accounts works best when paired with a dedicated cash and bond buffer. Regular rebalancing ensures the portfolio catches market gains during growth years while fully shielding immediate retirement paychecks during market downturns.

The Behavioral Dividend of a Structured Drawdown

The transition into retirement brings a massive psychological shock. When a steady salary vanishes, vulnerability sets in. 

This anxiety amplifies loss aversion, where the pain of a loss feels twice as intense as a gain. Without a clear framework, a sudden market dip can trigger panic, driving retirees to sell off growth investments at a cyclical bottom.

“When they go to retire, they’re going from this phase in life where it’s like, ‘I have money coming into my checking account every single month’ to basically that’s stopping,” says Billy F. Spencer, CFP®, TPCP™, CFT™, FBS®. “It’s a huge shift, and it’s normal for clients to feel unsettled by it… Our job is really to recreate that paycheck feeling, wherever that’s going to come from.”

“With stock markets, you really can’t control what’s going to happen on a day-by-day basis at all,” Spencer said. “But you can control where your money’s coming from, and how much cash you have, and what your asset allocation is. Those are things that you can actually focus on. It can help alleviate concerns around volatility as it comes up.”

Giving clients a sense of personal agency shields them against emotional selling. Advisors can ease anxiety by showing clients that near-term spending is secured in a fixed-income buffer. 

The Bottom Line

Ultimately, sequence of returns risk is an education problem just as much as a timing problem. Most clients enter retirement completely unaware of how fragile their portfolio is during the transition decade. 

An advisor’s most critical job is bridging this awareness gap by using a fixed-income buffer to show clients how near-term spending is secured. That protects clients from locking in permanent equity losses during early downturns, buying growth assets time to recover. 

However, managing this risk is never a “set-it-and-forget-it” task. A retirement income plan must remain flexible, adaptive, and highly tailored to changing life circumstances and unique goals.