Why the first five years of retirement matter so much — and how advisers help protect against lasting losses

How financial advisers try to shield retirees from sequence-of-returns risk

Retirees are especially exposed in the opening years of retirement to sequence-of-returns risk, the danger that a steep market drop, paired with ongoing withdrawals, can severely damage a portfolio’s ability to produce income. “The first five years are where a bad market does permanent damage, since the dollars that come out early never get the recovery,” says Juan G. Hernandez-Ariano, principal at WealthCreate.

That is why the early retirement period demands careful planning, whether someone manages it alone or works with a financial adviser. “If a retiree can get past the first five years of retirement without a large market drawdown, the probability is high that they will not run out of money,” says Peter Kosanke, a CFP specializing in physicians at Holton & Kosanke Wealth Management.

We asked eight financial advisers how they help recent retirees protect their wealth. Many of them rely on dividing retirement into three stages: immediate needs in the first few years, intermediate needs in the following years, and long-term growth for the later decades. The goal is to avoid being forced to sell investments at a loss.

Use a bucket strategy

For advisers who favor it, the bucket strategy is meant to provide security across the full span of retirement. It separates the portfolio into different pools based on risk and time horizon. The first bucket is a spending reserve, usually enough for one to two years of living costs, and is typically kept in cash or high-yield savings accounts. A second bucket holds a mix of stocks and bonds for near-term needs, while a third is more heavily weighted toward equities for long-term growth.

Jeremy Shipp, a CFP at Retirement Capital Planners, aligns assets with the time when the money will actually be spent. Funds needed in the next three years are kept in highly liquid, low-risk options such as cash, certificates of deposit, or money-market funds. Money set aside for years four through 10 goes into moderate-yield bonds or fixed-income funds. Assets that will not be touched for 10 years or more remain heavily invested in equities for growth.

“The worst time to reposition a portfolio is in the middle of a decline because that is when you convert a temporary loss into a permanent one,” Shipp says. “A retiree whose next three years of income is already funded is never forced to sell stocks into a falling market. That is the entire protection. It is not a trade, and it is not a reaction to headlines. It is a decision made in advance.”

Autumn Knutson, a CFP and founder of Styled Wealth, says the cash reserve is not only mathematically sensible but also emotionally useful. Knowing the next 12 to 24 months of cash flow is covered in a low-risk account can help clients endure market swings without panicking.

Still, advisers warn against keeping too much in cash. Mark Stancato, founder and lead adviser at VIP Wealth Advisors, says the cash bucket should cover only the client’s actual spending gap. “Reserving five years of total expenses can leave too much money in cash when reliable income already covers a substantial portion of spending,” Stancato says.

Get serious about budgeting

Hernandez-Ariano emphasizes identifying which expenses can be paused temporarily without making retirement feel like a failure. “I think that flexibility is the strongest lever in those five years, and it’s the piece people have thought about least … Getting honest about how low the spending number can go in a bad year is where I’d rather put the effort.”

Jon Lapp, a CFP at Haven Financial Advisors, puts that idea into a “guardrails” framework. Rather than guessing what the market will do, he and his clients agree ahead of time on a rule-based response. “Basically we establish their spending needs, and create some type of rule, such as ‘if the market declines 20% in any given year, we reduce our spending by 20%,’” Lapp says. He notes that this approach requires discipline and is not right for everyone, but clients who follow it can build a larger safety margin and, in some cases, retire earlier.

The tax window

One of the more unconventional ways to think about early retirement protection is to focus away from the market and toward taxes. Matthew Chancey, founder of Tax Alpha Companies, argues that taxes can be a more predictable threat than volatility. When someone retires, paychecks stop, but required minimum distributions and Social Security often have not begun yet. That creates a short window in which taxable income can fall to levels not seen since a person’s early adulthood, he says.

“Everyone plans for the market taking money in the early years. That’s what the cash buckets and bond ladders are for, and the instinct is fine. But the market only might take something,” Chancey explains. “Use the window and you can reposition money at the lowest rates you may ever get, moving dollars from accounts the government still has a claim on into accounts it doesn’t, while the price of moving them is low. Wait, and the window closes on its own.”

He adds that the best defense is reducing the one cost that can be anticipated with some confidence. “You can’t put the next downturn on a calendar. Your tax bill is already on one.”

Focus on planning, not prediction

Protecting a portfolio in the early years of retirement is ultimately about moving from accumulation to careful distribution. It means accepting that market timing cannot be mastered, while cash-flow management remains within a retiree’s control, says Scott Bishop, co-founder of Presidio Wealth Partners.

“I would rather have a client enter retirement with five years of thought-out cash flow than five years of market predictions,” Bishop says. “We cannot control when the next bear market occurs, but we can reduce the chance that a retiree is forced to sell long-term investments at exactly the wrong time. Plan, don’t react.”