Most retirement worry attaches itself to the number you can see, which is your account balance. The risks that actually decide how your retirement turns out are the ones you cannot see on a statement. Two of them stand out. One is about timing. The other is about time itself. Understanding both is the difference between a plan that looks fine on paper and one that holds up in real life.
Risk one: sequence of returns
Sequence of returns risk is the danger hidden inside a simple word, which is order. It is not just how much your investments earn on average. It is when the good years and the bad years arrive.
While you are still working and saving, a market drop is only a paper loss, because you are not selling. Once you retire and start withdrawing, the same drop becomes permanent, because you have to sell more shares to raise the same cash, and those shares never come back to enjoy the recovery. Two people can retire with the same portfolio, earn the same average return over thirty years, and end up in completely different places, based only on whether their rough patch came early or late.
Consider a quick example. Imagine two retirees who both average the same return over their retirement. The first hits a weak market in the opening years while drawing income. The second enjoys strong early years and meets weakness only much later. The first retiree typically ends up with far less, sometimes running low decades sooner, purely because of when the losses landed. Research by economist Wade Pfau estimates that the returns of just the first ten years explain roughly 77 percent of how a retirement portfolio ultimately performs.[1] That early window carries enormous weight.
A market crash in your first few years of retirement, while you are pulling money out, can do lasting damage that a later crash of the same size would not. Timing is a risk all its own.
Risk two: longevity
The second invisible risk is the happiest problem in finance. What if you live a long time? Living well into your nineties is wonderful, and it also means your money has to last much longer than most plans quietly assume.
People routinely underestimate this. The Longevity Illustrator from the American Academy of Actuaries and the Society of Actuaries shows that a healthy sixty five year old has roughly a coin flip chance of reaching their late eighties or nineties, and for a couple, the odds that at least one partner reaches their nineties are higher still.[2] A plan that assumes retirement ends at eighty five can leave a healthy couple exposed in the exact years they are least able to go back to work and fix it.
The two risks reinforce each other. A bad early market shrinks the portfolio, and a long life asks that same shrunken portfolio to keep paying out for years longer than expected. Together they are the quiet reason so many careful savers still feel uneasy.
The shield: turning risk into a score
Here is the useful insight. Both risks share a single weak point. They only bite the money you have to sell or draw down. Income that arrives on its own, month after month, for as long as you live, sidesteps both of them. There is nothing to sell into a downturn, and there is no end date to outlive.
That is why dependable income is the practical answer to two problems that look very different on the surface. The more of your essential spending it covers, the less of your life is exposed to market timing and to the calendar. The question then becomes measurable. How much of your life is already protected this way?
Your PSI is the share of your monthly spending covered by dependable income you will not outlive, rather than by money you draw from investments that rise and fall. The higher the score, the more of your everyday life runs on a paycheck instead of the market.
We read the score in three simple bands.
- 0 to 50 percent, Exposed. A large share of your lifestyle depends on drawing from investments, which leaves you more open to both risks above.
- 51 to 75 percent, Building. You have meaningful protection in place and room to strengthen it.
- 76 percent and up, Stable. Most of your everyday life is funded by income you cannot outlive.
A higher score does not predict the market and it does not promise a result. What it does is show, in one honest number, how much of your retirement is running on a paycheck rather than a guess. That is exactly the part these two invisible risks attack.
See your own score in about five minutes. The calculator shows your Stability Score today, and how it could rise as you cover more of your essentials with dependable income.
Check my Stability Score →Putting it together
Sequence of returns risk and longevity risk are not reasons to be afraid of retirement. They are reasons to build a floor. The Two Portfolio Strategy™ is how you build it, covering essentials with dependable income and leaving the rest invested for growth. The Paycheck Stability Index is how you keep score along the way, so the protection you are building is something you can see and improve, not just hope for.
Common questions
What is a sequence of returns risk example?
Imagine two retirees who earn the same average return over thirty years and withdraw the same amount each year. One faces weak markets in the early years and strong markets later; the other has the reverse. The one who hits weak early years while withdrawing typically ends up with far less money, because shares sold during the downturn never take part in the recovery. That difference, caused only by timing, is sequence of returns risk.
What is longevity risk in retirement?
Longevity risk is the chance that you live longer than your retirement plan assumed, which means your savings have to stretch over more years than expected. Actuarial data shows a healthy sixty five year old has roughly a coin flip chance of living into their late eighties or nineties, and for couples the odds that one spouse does are higher.
What is the Paycheck Stability Index?
The Paycheck Stability Index, or PSI, is a score that represents the share of your monthly spending covered by dependable income you cannot outlive, such as Social Security, pensions, and guaranteed income, rather than money drawn from investments. A higher score means more of your life is protected from market timing and from outliving your money.
Sources
- Wade Pfau, Retirement Researcher, "Why Sequence of Return Risk Matters for Your Retirement Income."
- American Academy of Actuaries and Society of Actuaries, Longevity Illustrator.
- William P. Bengen, Determining Withdrawal Rates Using Historical Data, Journal of Financial Planning, October 1994, which first formalized sequence of returns risk.