One Decision, Two Outcomes: A Retirement Case Study
One Decision, Two Outcomes: A Retirement Case Study
In an earlier article, we walked through sequence of returns risk — the idea that the order in which market gains and losses arrive matters just as much as the average return itself, especially once you start drawing income from your savings. It’s an easy concept to understand in the abstract. It’s a different thing entirely to see what it actually means for a real family, at a real moment in their lives.
So let’s build one.
Meet Mark and Susan
Mark and Susan are both 60. Mark has spent 25 years with the same company and has built a 401(k) balance of $1.8 million; Susan’s own 401(k), from her career, holds $885,000 — a combined $2.685 million between them. Mark earns $225,000 a year; Susan earns $110,000. Seven years ago they bought their current home, financing it at 4.25%, and their mortgage payment runs $3,700 a month. Beyond that and the cost of caring for their daughter, they carry very little debt.
They have three grown children: a 37-year-old son, single; a 35-year-old daughter, married; and a 32-year-old daughter who is unmarried and unable to fully care for herself, requiring ongoing physical and financial support that Mark and Susan expect to provide for the rest of their lives — and to plan for beyond that.
Mark and Susan both intend to retire in five years, at 65, and both plan to file for Social Security at that point — a combined $5,500 a month. Their retirement vision is full: extensive travel, more time with their children and grandchildren, and the ongoing responsibility of making sure their daughter is cared for no matter what else happens in the markets.
On paper, they’ve done everything right. Nearly $2.7 million saved. Two steady incomes. A manageable mortgage. Five more years of contributions ahead of them. By any conventional measure, Mark and Susan are ready.
But “ready” depends entirely on what happens in the years right around retirement — and that’s where their story splits into two very different paths.
The Moment That Matters Most
Here’s what most retirement planning doesn’t fully account for: the five years before retirement and the five years after are, statistically, the most consequential stretch of the entire plan. Not because the money is largest then — it usually is — but because a downturn that lands in that window has nowhere to hide. There’s no decade of future contributions left to smooth it out, and once withdrawals begin, a bad sequence of returns doesn’t just reduce the portfolio — it can permanently impair its ability to recover, because money is being drawn out of it while it’s down, not while it’s growing.
For Mark and Susan, that window opens in exactly five years. Their retirement date isn’t flexible in the way it might be for someone without a dependent adult daughter counting on their stability. Travel plans can be postponed. Their daughter’s care cannot.
This is where two versions of their story begin to look very different — not because of anything either version of Mark and Susan did wrong, but because of how their savings were structured going into that window.
Investor B: Fully Exposed
In this version, Mark and Susan’s entire $2.685 million stays exactly where it’s been for 25 years — invested in the market, growing well through their working years, and still fully market-exposed the day they retire.
Now suppose a downturn arrives in year one or two of their retirement — not a catastrophic one, just an ordinary correction, the kind markets have produced repeatedly throughout history. Mark and Susan still need to cover their mortgage, their travel, and their daughter’s care. With Social Security covering only part of that, the rest has to come from the portfolio — and if the market is down, that means selling investments at a loss to generate the income they need.
Every dollar withdrawn during a downturn is a dollar that can never participate in the recovery that follows. The portfolio doesn’t just take a paper loss — it takes a permanent one, layered on top of ongoing withdrawals. Over time, that combination is what can turn a well-funded retirement into one where travel plans get scaled back, and worse, where the long-term care plan for their daughter becomes less certain than it was the day they retired.
This isn’t a theoretical risk. Between 2000 and 2010 — a stretch now commonly known as the “lost decade” — an investor tracking the broad market lived through two separate, severe downturns: the dot-com collapse of 2000–2002 and the financial crisis of 2007–2009. By the end of that ten-year period, the index itself had essentially gone nowhere. For someone still working and contributing through those years, that decade was painful but survivable — the losses eventually recovered, and new contributions kept building the base underneath. For someone withdrawing from that same portfolio to fund retirement, it’s a fundamentally different story. Every withdrawal made during those down years permanently shrank the base that needed to recover, compounding the damage in a way the eventual recovery never fully undoes.
The chart below shows exactly this, using the S&P 500’s actual year-by-year returns from 2000 through 2010. Both lines start at the same $1,000,000. One stays fully invested and never touches the money. The other withdraws $50,000 a year — a 5% withdrawal rate, a commonly used and fairly conservative retirement planning benchmark — from the same portfolio, facing the same market, in the same order it actually happened.
By 2010, the fully invested line has recovered essentially back to where it started. The line taking withdrawals has been cut to roughly a third of its starting value — not because of one bad year, but because every withdrawal made during a down year permanently reduced the base that needed to recover, over and over, for a full decade. That’s sequence of returns risk, in real numbers, from a decade that actually happened.
Now place Investor B inside that decade — five years into retirement, drawing from a fully market-exposed portfolio to cover the mortgage, travel, and their daughter’s care. A stretch like 2000–2010 wouldn’t just delay their plans. Sustained withdrawals through a decade like that could draw the portfolio down toward a level it may never fully recover from — precisely during the years their daughter depends on them most.
Nothing about Investor B’s decisions was reckless. The risk was simply never structured out of the plan.
Investor A: A Protected Layer
In this version, Mark and Susan made one structural change in the years leading up to retirement: they carved out a portion of their combined savings — not all of it — into a fixed indexed annuity with a guaranteed income rider, leaving the remainder invested in the market as before.
That FIA portion doesn’t disappear from the plan; it changes its job. Instead of being exposed to whatever the market does in year one of retirement, it’s designed to provide a guaranteed income floor — one that, combined with their Social Security, is structured to cover their non-negotiables: the mortgage, and the baseline cost of their daughter’s ongoing care. A 0% floor means a down market year doesn’t reduce what’s already been credited to that portion of the plan.
Now the same downturn arrives in year one or two of retirement. Mark and Susan’s essential expenses are already covered by guaranteed income, so nothing forces them to sell their market-invested savings while they’re down. That portion of the portfolio gets the thing it actually needs most in a downturn: time. Time to recover before it’s touched again.
The travel budget might flex a little in a rough year — that’s true in either version of this story. What doesn’t flex is the floor underneath their daughter’s care, or the mortgage payment, or their basic security. That’s the difference a protected income layer is designed to make.
Place Investor A inside that same chart above, and the picture changes shape. The mortgage and their daughter’s care stay funded from the protected layer regardless of what the index does in any given year of that decade — nothing forces a sale of the market-invested portion while it’s down. That portion of their savings gets to be the fully invested line, not the withdrawal line: left untouched through both downturns, with the entire decade to eventually participate in the recovery that followed. Same difficult market. Same family. A very different position to be in when it ends.
The Real Question
Mark and Susan’s numbers are hypothetical, but the underlying decision isn’t. It’s the same one every family approaching retirement eventually faces: how much of what you’ve built should stay fully exposed to the market, and how much should be structured to protect the parts of your plan that simply cannot flex — a mortgage, a dependent family member’s care, your own baseline security.
There’s no universal answer, and the right split depends entirely on your own numbers, your own timeline, and what in your plan genuinely can’t bend. But that’s exactly the conversation worth having — ideally years before the retirement date arrives, not after a downturn has already made the decision for you.
If you see any part of your own situation in Mark and Susan’s story — a dependent who needs long-term stability, a retirement date that isn’t fully flexible, or simply a desire to know which parts of your plan are protected and which are exposed — I’d welcome the conversation.