Most of us grew up hearing that markets go up over time, and over long enough stretches, that has generally held true. What gets left out of that story is timing. A loss that happens when you are 35 and still adding to savings behaves very differently than a loss that happens when you are 65 and starting to draw income. Same size loss, very different consequences. Here is why, and why it matters more the closer you get to using the money.

The Math Nobody Explains

A loss and the gain needed to undo it are not the same number. If a balance drops by 25 percent, it takes a gain of about 33 percent just to get back to even. If it drops by 50 percent, it takes a gain of 100 percent to recover, not 50. That is simple arithmetic, but it surprises a lot of people the first time they see it written out. The bigger the drop, the more disproportionate the climb back has to be.

When you are decades from needing the money, that math is uncomfortable but survivable. You have time, and often new contributions, working alongside the recovery. When you are closer to the end of your working years, or already drawing income, that runway shortens, and the same math becomes a much bigger problem.

Sequence of Returns, Explained Plainly

There is a concept in retirement planning called sequence of returns. In plain language, it means the order your gains and losses arrive in matters, not just the average of them over time. Two people can have the exact same average return over twenty years and end up in very different places, depending on whether the losses hit early or late.

Here is why. While you are still adding money to savings, an early loss just means you are buying in at lower prices for a while, and time can smooth that out. But once you start withdrawing income, an early loss does something different. You are pulling money out of a balance that has already shrunk, which leaves less left over to participate in any recovery that follows. The withdrawals and the losses compound against each other.

Why Time to Recover Is the Real Variable

The size of a loss matters, but the real variable we think people should pay attention to is how much time they have to recover from it before they need that money for living expenses. A 30 percent drop with fifteen years of runway is a very different situation than the same drop with three years of runway, or with income withdrawals already underway.

This is the question we think is worth sitting with well before retirement day arrives: not just “how much risk am I comfortable with,” but “how much time would I have to recover if this went the wrong way at the wrong moment.”

A Hypothetical Illustration

Consider a hypothetical retirement account worth 500,000 dollars. A 20 percent drop brings it to 400,000. Getting back to 500,000 from there requires a 25 percent gain, not 20. Now picture that same drop happening the year someone begins taking 5 percent annual withdrawals for living expenses. The withdrawals continue to come out of a smaller balance, so the account has to work even harder, over a shorter time frame, just to hold steady, let alone grow. This is a simplified, hypothetical example meant to illustrate the concept, not a prediction or a specific recommendation.

What This Means for Planning

None of this is a reason for despair, and it is not a case for predicting where markets are headed next. It is simply a case for matching the money to the calendar. Funds you will not touch for fifteen or twenty years can generally absorb more ups and downs than funds you expect to draw on in the next few years. The planning question is not whether markets will have a bad year again at some point. They will. The question is whether your near-term income needs are positioned so that a bad year does not force a decision you would not otherwise make.

Dave Stanley is a retirement, insurance, and income specialist and host of the Safe Money and Income radio show, broadcast from Grandville, Michigan. If you would like to talk through how this idea applies to your own situation, we offer a 15-minute conversation at no cost. Call (616) 719-1979.

Written with AI assistance from Dave Stanley’s radio commentary and reviewed by Integrity Financial Service, LLC. This article is general education, not individualized advice.