As a physician, you’ve worked hard to build your retirement savings. You may have heard that when you retire can matter as much as how much you’ve saved. But few people fully appreciate just how dramatically one or two years of bad markets — landing at the wrong moment — can alter the trajectory of an otherwise well-planned retirement.
This is what we call sequence of returns risk. And in 2026, it’s a concept worth revisiting with fresh eyes. After back-to-back strong years in 2024 and 2025 (the S&P 500 returned roughly 25% and 18%, respectively), the market opened 2026 on shakier footing — down about 4% through the first quarter. For physicians nearing retirement, that’s a timely reminder of just how consequential timing can be.
Below, I’ll explain how sequence of returns risk works and — more importantly — what you can do to protect against it.
What Is Sequence of Returns Risk?
Sequence of returns risk refers to the potential impact that the order of investment returns has on your portfolio when you’re actively withdrawing money in retirement. In simpler terms: it’s not just about what returns you earn over time, but when you earn them.
This risk is entirely absent during your accumulation years — when you’re adding to the portfolio, bad years are actually buying opportunities. But the moment you start withdrawing, the math reverses. Now poor early returns compound against you, because you’re selling shares at depressed prices to fund spending, permanently reducing the base that future gains can work on.
A Tale of Two Portfolios
Let’s look at a hypothetical scenario. Imagine two physicians — Dr. Smith and Dr. Jones. Both start with $100,000 in their retirement accounts and withdraw $4,000 annually (increasing by 3% each year to keep up with inflation). They both experience the exact same average return of 8.71% over 24 years — the actual S&P 500 average from 2000 to 2023. The only difference? The order in which they experience those returns.
Dr. Smith retires in 2000 and immediately starts withdrawing. The market takes a significant downturn in her first few years — which is exactly what happened historically (the dot-com bust of 2000–2002, followed by the 2008 financial crisis). Dr. Jones experiences the identical returns, but in reverse order: he starts with the strong bull market years before encountering any significant losses.
Despite identical average returns and identical withdrawals, their outcomes are dramatically different:
- Dr. Smith’s ending balance: $21,740
- Dr. Jones’s ending balance: $297,929
Dr. Jones ends up with over 13 times more money than Dr. Smith — from the exact same returns and withdrawals. Same average. Completely different outcome.
Why Such a Big Difference?
Let’s look at the same information but as a line chart:
Here you see how Dr. Smith’s portfolio (Portfolio 1) struggles to recover from early losses, while Dr. Jones’s portfolio (Portfolio 2) builds a substantial cushion in the early years.
When you withdraw money from a shrinking portfolio, you’re locking in losses. You’re forced to sell more shares to raise the same dollar amount, which permanently reduces the number of shares available to benefit from future recoveries. It becomes increasingly difficult to claw back — even when better returns eventually arrive.
On the flip side, when your portfolio grows strongly in the early years of retirement, you’re withdrawing a smaller percentage of a larger base. That leaves more invested and working for you, creating a cushion that can absorb difficult years later without threatening the portfolio’s longevity.
The lesson isn’t that markets are unpredictable — we know that. The lesson is that your portfolio’s vulnerability to poor returns is highest in the first several years of retirement, and your strategy needs to account for that.
What This Means for You in 2026
Sequence of returns risk has always been real, but several current realities make it especially worth discussing right now.
1. Know the Updated Safe Withdrawal Rate
The classic “4% rule” — withdraw 4% of your portfolio annually, adjusted for inflation — has long been the starting point for retirement income planning. But as of 2026, Morningstar’s research puts the safe withdrawal rate at 3.9% for a traditional 30-year retirement, assuming a 90% success probability. That’s not a dramatic difference, but it matters at scale.
More importantly for physicians: if you retire at 60 or earlier and plan for a 35–40 year retirement, the math changes substantially. For retirements lasting 40 years or more, research suggests a withdrawal rate closer to 3.0–3.5% is more appropriate. Given that U.S. life expectancy has hit a record high — and physicians, as a group, tend to live longer than average — planning for a 30-year retirement may actually be underestimating how long your money needs to last.
2. Build a Cash Buffer — or Better Yet, a Bucket Strategy
One of the most effective defenses against sequence of returns risk is ensuring that near-term spending never depends on selling stocks at depressed prices. The formal version of this idea is the bucket strategy, and it works like this:
- Bucket 1 (Years 1–2): One to two years of living expenses held in cash or money market accounts. This is your spending account — you never need to touch your investments during a downturn because this bucket covers you.
- Bucket 2 (Years 3–10): Five to eight years of expenses in high-quality bonds, CDs, and short-term fixed income. This replenishes Bucket 1 and provides stability.
- Bucket 3 (Years 10+): The remainder invested for long-term growth in equities and other growth assets. This bucket has time to recover from downturns because you won’t touch it for a decade or more.
In today’s environment, there’s an added benefit: short-term bonds and money market funds are actually generating meaningful returns — 4–5% on Treasuries — which means your buffer isn’t sitting idle the way it was during the near-zero rate years of 2020–2021. Your defensive assets are earning something while they wait.
A simple alternative for physicians who want a more informal buffer: maintaining a HELOC (Home Equity Line of Credit) as a backstop. If markets are down significantly in a given year, you can draw on the HELOC for living expenses rather than selling equities at a loss, then repay it when the market recovers.
3. Consider a Dynamic Withdrawal Strategy
If possible, build flexibility into your spending plan from the start. The idea is simple: in strong market years, you can spend as planned; in down years, you pull back modestly. Even small reductions in withdrawal rate during early bad years can meaningfully extend portfolio longevity.
A formalized version of this is the Guyton-Klinger guardrails approach: you set an upper and lower threshold around your target withdrawal rate. When your portfolio drops and your effective withdrawal rate creeps above the upper guardrail, you trim spending by a preset amount (say, 10%). When the portfolio performs well and the rate dips below the lower guardrail, you can safely spend more. Morningstar’s research shows that dynamic strategies like this support higher starting withdrawal rates (potentially 5%+) while maintaining portfolio sustainability — because you’re adapting to reality rather than rigidly following a fixed rule.
4. Reassess How You Think About Bonds
The original wisdom — hold bonds as a stabilizing ballast in your portfolio — took a serious hit in 2022, when both stocks and bonds fell sharply at the same time, eliminating the usual diversification benefit. That was a painful reminder that bonds are not risk-free.
The good news is that with rates now in a much healthier range, bonds are genuinely useful again. The 10-year Treasury is yielding around 4–5%, which means your fixed income allocation is generating real income — not just acting as a safe haven. But the lesson from 2022 still applies: don’t treat bonds as a guaranteed buffer against stock market volatility. A diversified approach — including short-term bonds, TIPS (inflation-protected bonds), and other income-producing assets — remains more prudent than relying on any single stabilizer.
5. Plan for the Long Haul — Longer Than You Might Think
Retirement could realistically last 25–35 years or more for a physician retiring in their early 60s. That’s a long time for sequence of returns risk to work for or against you. The good news is that with a longer horizon, your portfolio has more time to recover from early setbacks — but only if your strategy prevents you from selling into those setbacks in the first place. That’s exactly what the buffer and bucket approaches are designed to do.
The Bottom Line
Sequence of returns risk is one of the most underappreciated threats to a physician’s retirement — not because the concept is complicated, but because it’s invisible during the years you’re building wealth. It only shows up when you start spending.
The market wobble we’ve seen in early 2026 is a useful reminder: the first few years of retirement are when your portfolio is most exposed. You can’t control when markets rise or fall, but you can build a strategy that doesn’t require you to sell at the worst moments.
Retirement planning isn’t just about accumulating a target number. It’s about constructing an income plan that can weather whatever the market delivers — in any order, in any year. And with retirement potentially stretching three decades or more, getting that plan right is worth every bit of the effort.
