How a $2.4 Million 401(k) Can Lose $100,000+ if Retirement Withdrawals Start at the Wrong Time

Same portfolio, very different outcomes

Two people can retire with the same nest egg and still end up hundreds of thousands of dollars apart. Consider two retirees who both start with $2 million, withdraw $80,000 a year adjusted for inflation, and earn a 5% average return over 20 years. One finishes with roughly $2.4 million; the other ends up near $1.7 million. The difference is not the average return. It is the order in which the gains and losses occurred.

Why the timing of returns matters more than the average

This is sequence risk in plain English. When you are still working, market drops can be helpful because your regular contributions buy more shares at lower prices. In retirement, the opposite happens. If poor returns hit while you are already withdrawing cash, you have to sell more assets to raise the same amount of money. That locks in losses at the worst time and leaves a smaller portfolio to recover.

Sequence risk matters most when withdrawals begin early

Sequence-of-returns risk is not the same as volatility by itself. The real danger is volatility meeting withdrawals. That is why two retirees can start from the same place and still finish very far apart: same average return, different order.

A 25% rebound does not erase the damage

People often assume that once the market bounces back, the problem disappears. It may not. A 20% loss requires a 25% gain just to return to the starting value. If that recovery happens after you have already been taking withdrawals, it is working from a smaller base, so the portfolio may not fully repair itself on the timeline you expected.

Average annual return also obscures timing. It tells you the midpoint of performance, but not when the gains or losses occurred. Once withdrawals begin, that timing matters because early losses can reduce the assets available for future growth.

Recovery can take much longer than expected

If a portfolio is hit early in retirement, the consequences can compound. You sold assets while prices were weak, removed cash that could have participated in the rebound, and are now asking a smaller balance to keep funding your lifestyle.

That is why withdrawal design matters so much in the current environment. Morningstar's baseline safe withdrawal rate for new retirees in 2026 is 3.9%, but flexible withdrawal strategies can lift that to nearly 6%. For someone retiring now, the first few years are especially important because poor early returns during withdrawal years are what tend to cause the most lasting damage.

What to watch if retirement is near

The practical question is not whether markets can rebound. It is whether your withdrawal plan gives the portfolio enough room to recover if it does. If you retire near a downturn, the order of returns can change the outcome by six figures, even when the long-run average return looks fine.