As you draw closer to retirement, one of the greatest retirement dangers is sequence of return risk. Sequence of return risk is the hazard of withdrawing money from your investments when the balance is down due to market volatility. Sequence risk can increase the likelihood that you can run out of money and also reduce your investment performance.
WHEN IS SEQUENCE OF RETURN RISK MOST IMPACTFUL?
Sequence of return risk rears its head in three common situations:

Income Needs - Drawing income from your retirement investments for living expenses
Emergency or Unanticipated Needs - Life happens, as we all know.
RMDs - Required Minimum Distributions will need to be taken starting at 72 from your tax-deferred investments such as a 401(k) or IRA.

Your overall portfolio can suffer, because you need your money and can’t wait.
INVESTMENT AND INCOME PLANS THAT ARE DESIGNED FOR UP AND DOWN MARKETS
Before we dive into an example, it’s important to understand that the stock market is very difficult to predict. If you’re trying to time the market with a majority of your assets, especially as you are close to or in retirement, you’re setting yourself up for failure.You need an investment and income plan that works in both up and down markets.
EXPLORING SEQUENCE OF RETURN RISK IN TWO INVESTMENT SITUATIONS
There are three primary phases of investment planning. The first is accumulation, the second is preservation, and the third is distribution.

Here is an example of a sequence of returns when you’re in the accumulation stage of planning.

Example 1: Accumulation with No Withdrawals (See pg. 19 in the Bucket Plan by Jason Smith)

From a mathematical perspective both started with $100,000 and averaged 6% over 10 years. Neither are taking any distributions and ended up with $154,764. Once again, they aren’t taking distributions and are in the accumulation stage. 

In other words, the sequence of return risk does not impact the accumulation balance if no money is being added or taken out. The rate of return and market loss will impact the balance but whether the variations are at the beginning or the end does not.

Example 2: Accumulation with Withdrawals (See pg. 21 in the Bucket Plan by Jason Smith)

In this example both started with $100,000 and average 6% over 10 years but this time both are withdrawing $6,000 per year out for retirement income. Remember in these examples that they are the same average returns but one has the down years first and the other has the down years later.

Ms. Lucky, who had up years first, finished with $105,544, while Mr. Unlucky had only $38,898!
RATE OF RETURN CAN BE MISLEADING IN THE DISTRIBUTION PHASE
When in the accumulation phase, you often measured investment success by rate of return. I’d suggest that while rate of return is important during the preservation and distribution phase, it isn’t how you measure success. What is more important is avoiding the sequence of return risk.

A question Jason shares in his book is, “When does -30 + 43 = 0?” While you may simply think this is bad math, it is completely correct with investing. When you lose 30%, you need to have a 43% rate of return to make your money back. If your investments are down 50%, you need 100% return!

When in the distribution phase, your account balance is more important than rate of return. It may not seem realistic but lower rates of return mixed with downside protection can beat greater rates of return during the distribution phase.
A POWERFUL STRATEGY TO FIGHT SEQUENCE OF RETURN RISK
When you approach retirement (within ten years), in my opinion, it’s time to start shifting from the accumulation phase and begin to transition into the preservation phase, which works alongside the distribution phase during your retirement years.