Why the Year You Retire Matters More Than How Much You Have Saved

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Two retirees. Same $2M portfolio. Same market crash in year one. Completely different retirements. In this episode, Taylor breaks down sequence of returns risk, why it's one of the biggest threats to a multi-million dollar retirement, and the withdrawal structure that separates the retirees who thrive from the ones who don't. If you have $2M or more saved for retirement, this is the risk most plans never address.

Watch Next: A full retirement case study: https://youtu.be/uYTiLWqM9gA

📌 CHAPTERS:
0:00 Same $2M, same market crash, different retirements
0:57 What is sequence of returns risk?
1:56 Real S&P 500 data shows the impact of one bad year
4:09 Robert and Susan: a tale of two $2M retirements
5:10 Why the first 5 years of retirement are the most dangerous
7:14 The 3 tax buckets most retirees get wrong
9:52 What a market crash actually feels like without a paycheck
12:27 The Retirement Shock Absorber framework explained
14:37 How a down market can become a Roth conversion opportunity
15:39 Why you need to build your structure before you retire
17:08 A real client story from April 2025

Resources:

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Phone: (509) 536-9556

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Transcript

SPEAKER_01 0:00

Today's content is pulled from Taylor's YouTube channel. If you want to watch the video version or catch more great content, subscribe by clicking the link in today's show description. Welcome to Taylor Made Retirement, where we explore what it takes to build a retirement that works for your money and your life with third generation certified financial planner Taylor DeMars.

SPEAKER_00 0:28

Two retirees, the same age, the same $2 million saved, and they both stopped working in the same year and both experienced a market crash in year one. Fast forward 10 years later, they have completely different lives. One is traveling, spending freely, helping their kids, doing everything they imagined a retirement would look like, while the other is back working part-time, scared to touch their portfolio, living smaller than they did when they had a paycheck. They had the same amount of money, same market, and experienced the same downturn. The difference between the two wasn't how much they had saved, how disciplined they were, or whether the market went down, but what structure they had in place before the first bad year hit. I'm Taylor Damars, CFP and third generation financial planner, and I sat across from hundreds of people making the transition from saving to spending. I want to show you what this risk actually looks like, why it hits harder than most people expect, and what those who navigated it successfully had in place before it happens. But to understand how two near-identical portfolios can lead to two completely different retirements, you first have to understand why market risk changes the moment your paycheck stops. Because you've spent 30 plus years watching your portfolio grow. You know market risk. You've lived through 2008, through COVID's ups and downs, and every correction and recovery since then. And what most people don't realize is that the market risk works differently once retirement withdrawals start. Because when you're saving, a bad year is actually a buying opportunity. The market's on sale, your contributions buy more shares. However, when you're withdrawing, that logic flips. A bad year retirement means you're selling shares at a discount to fund your living expenses. And those sold shares don't come back. They don't participate in the market recovery. That math that worked in your favor during the accumulation phase is now working against you. This is called sequence of returns risk, and it's one of the most significant threats to a multi-million dollar retirement that most plans never directly address. I want to show you how dramatic this can be with real numbers. This chart shows two different portfolios experiencing investing in the SP 500 from 2003 to 2022. Two portfolios, both starting at $1 million, and both are withdrawing $60,000 a year for their income. The average return over those 20 years is exactly the same. The only difference between these two lines is that the first and the last year's returns are flipped. The portfolio that started with a strong first year ended up with over $2.1 million after two decades. However, the one that took the 18% drop that actually happened in 2022, and if we pretend that happens at the very beginning with all the other years being the same, and also flipping the last year for the first year, they actually end up running out of money by year 17. This is a scenario with the same starting balance, the same average return, and even the same withdrawal amount. But the only thing that changed, which is what year showed up first. Now I realize this is a cherry-picked 20-year window using actual market data, but nobody pretends to know exactly when the ups and downs are about to hit. But this graph is to illustrate the point that both of these portfolios were invested entirely in the market with no withdrawal structure in place. No buckets, no shock absorber, just a portfolio and a withdrawal amount. But the difference couldn't be more stark. One ending up with double the amount of money and the other not even making it to the finish line. This impact doesn't just happen to someone with a million dollars, like in this graph. Imagine if it happened to someone with two million, like this scenario that we're about to walk through, or go further with three or four million. My dad, who's been doing retirement planning for over 30 years, has a saying I think about a lot. He says a small mistake on a small amount of money is a small mistake, but a small mistake on a large amount of money is a big mistake. You see, the bigger the portfolio, the more you stand to lose from getting the withdrawal structure wrong. So let me show you what this actually looks like with a tale of two retirements, all called between Robert and Susan. Robert is 63, recently retired after 30 years of being an engineer, and he had been planning retirement for a decade, feeling ready, confident, and excited to get started. Susan is 62 and just left a long career in hospital administration. She kept being kicking that can down the road of saying just one more year until I retire for the past few years, and she's finally pulled the trigger, but is still not completely sure she was ready. In both scenarios, let's assume they start with $2 million. Both plan to withdraw $80,000 a year, and both retire in the same year. And in that year, both of them watched the market drop by 20%, similar to what we experienced recently in 2022. Here's the difference. Robert had already built what I would call a retirement shock absorber, a withdrawal structure designed to keep a bad first year from forcing more bad decisions. Susan also had $2 million, a general sense that she'd be okay, but no intentional withdrawal plan. Same money, same market, the same crash, but only one of them is structured to survive it. But the real danger isn't just the math. It's when the math shows up, because the first five years of retirement carry a weight that most people don't expect. Your portfolio is often at its absolute largest the moment you stop working. And from that day forward, you're drawing it down consistently, regardless of what the market's doing. There's no paycheck absorbing a bad year, no employer match softening the blow, and every dollar the portfolio loses in a down year is a dollar that was supposed to last 20 or 30 plus years. So for most people retiring pre-62, Social Security isn't even an option yet. You might even not even claim for several years depending on your strategy. Of course, Medicare wouldn't have kicked in either, so you're likely covering your own health insurance premiums completely out of pocket as well. Every dollar that pays for your mortgage, gas, groceries, insurance, it's all coming from the portfolio. There's no income floor beneath you, so if the market does drop 20% in that window, you're pulling from a shrinking pool to cover the expenses that don't shrink with it. This is the window where sequence of returns risk does its most damage. And it's the window that Susan walked into without a plan. Unfortunately, I've seen this played out many times. People who had done everything right, saved consistently, diversified, chosen a reasonable withdrawal rate, and even may have done a Monte Carlo score, giving them a 90 plus percentage of success. But that statistic of a 90 plus percent probability of success is simply a tool. Yes, it runs thousands of scenarios to estimate how well your plan might survive, and it's useful. It's not an instruction manual. It can't predict how often your plan will specifically survive in various markets, and it doesn't tell you what to do, not if but when you experience a bad year. Susan had a plan like that with a good overall vision, but when the market dropped, suddenly that number didn't mean exactly what she thought it meant. Because the sequence of when you experience the up and the downs of the market is more important than the average. And this is where I see most retirement plans missing the mark. They show what the portfolio might do or assume a gradual or even rate of return over time, but they don't show what you should do when things go wrong. Most people I sit down with have for the first time have maybe three, four, or five different accounts. And when I ask, okay, which ones are you going to withdraw from when the market inevitably has a dip? They go quiet. Not because they're not smart, but because no one's ever walked them through it. Because you see, you don't have just one pile of money. Most people have up to three different tax buckets in their portfolio. You're probably familiar with a pre-tax bucket. This is often your 401k or IRA. And then there's tax-free bucket, like Roth money, a Roth IRA. And the third bucket is a taxable brokerage. Each one has wildly different impacts on your plan, depending on not only how you strategically withdraw from them, but also in a down market. And pulling from the wrong account at the wrong time is where the real damage compounds. If you're pulling from pre-tax accounts, every withdrawal is taxable income. When the market drops and you're forced to sell the fund your lifestyle, you're triggering taxes on money that's already worth less. And if you have Roth money, a down market may be a time to leave it alone and let it recover tax-free, depending on the rest of your income plan. Selling Roth assets early in a bad market is a gut punch to your golden goose, which is ideally producing some of your most powerful long-term growth. And this is exactly what happened to Susan's scenario. She didn't have a plan for which account to pull from first, so when the market dropped, she pulled from whatever was convenient, which for most people happens to be their pre-tax IRA. Selling shares at a loss triggers a tax bill she wasn't expecting, permanently reducing the amount of shares that could participate when the market eventually recovered. Robert, on the other hand, was living through the same market. The difference was his withdrawal structure told him exactly where to pull from and in what order, so he never had to touch his long-term holdings. Most retirement plans just show you the total portfolio value, but not where to pull from in what order. And that changes completely when the market drops. So this sequence is one of the most consequential decisions of arguably your entire retirement. And it's not one you want to make a decision on just based on what's convenient or a gut instinct. The right answer is rarely the default answer. Now, if you want to see exactly which account you should pull from in retirement if the market drops in year one, and whether you have a shock absorber plan in place, there's a link in the description below to schedule a conversation with me. But stay with me because what comes next is the piece that changes about how most people think about year one. Because everything I've covered so far, the sequence of returns risk, the withdrawal order, the account coordination, all that assumes you make rational decisions when the market drops. From firsthand experience, I know that most people don't. Think back to when the market dropped in 2008, you were still working, you had a paycheck, and you can honestly tell yourself, hey, this is going to be temporary, and I'm going to hold and let the market recover. But when the market drops in year one of your retirement and there's no paycheck safety net, and when you've already withdrawn $80,000 for your lifestyle and you're watching your 2 million pot go down to $1.6 million, that's a completely different experience. For someone who already wasn't sure whether they could stop working, a year one drop just confirms every fear in the book. It validates the voice they had to say, I should have worked just one more year. And there's a layer underneath that that most people don't talk about, which is you've spent over three decades building this portfolio. Every paycheck, every bonus, every time you chose to save instead of spend, that's how you got to this portfolio size. So your entire financial life has been about watching that number go up. And now the first thing in retirement asks you to do is watch it go in the other direction. That shift from building to spending is almost one that nobody talks about until they're living it. So let's think about Susan. She pulled the trigger after years of hesitation. And then in year one, the market dropped. For her, that wasn't just a financial event. It felt like proof that she had been right to be afraid. So she did what she felt was responsible. She cut her spending drastically, sold more investments to create a cash cushion, and then started looking for part-time work. Not because the math required it, but because her fear and paranoia did. Robert, on the other hand, watched the same decline, but didn't sell the part of the portfolio meant for the long term because his structure didn't mean he had to. He had time to let the market recover. And that time is something Susan didn't have, giving him the ability to stay calm while the storm passed and continue to fund his needs, wants, and wishes. The most painful retirement outcomes I've seen weren't caused by bad markets. They were caused by good people making understandably hard decisions from a fearful place at exactly the wrong time. The goal from this structure isn't just to protect your math, it's to protect your behavior when everything feels uncertain. So the question isn't how do you avoid every bad market? It's how do you build a structure to know that not if but when a market comes that is on a downturn, you're ready to not make a bad decision. In our practice, we leverage a bucket's income system I call the retirement shock absorber. The idea is straightforward. You separate your money by time horizon, not by account type, but by how soon you actually need it. The leftmost bucket here is the one that needs to be fed. You will call it your checking account. Whether it's gas, groceries, vacations, emergency needs, right? It needs to make sure that it has the dollars coming in, no matter what. It doesn't care if it's from a pension, social security, or likely your portfolio. So we have the other three buckets segmented by time to take care of it. The first layer is often money that's needed within the next year, kept somewhere that can be used at a moment's notice, and it can't lose value when the market drops. We like to call this the pantry because these are supposed to be the funds that are arm's length. Many people call it their emergency fund. Second bucket is your medium-term money to keep up funds for about two to five years of income needs. And it also sits in a conservative position. We call this the bond bunker, as we usually invest in liquid bonds that generate income without requiring one to have their money locked up for a certain period of time. This bond bunker is helping us weather the storm and bridge between your near-term spending and your long-term growth. So extends the runway that you're not just protected for a year, but ideally for a full recovery cycle. You might recall that the stock market took five years from the top of 2008 to the drop to the 2013 when it finally recovered from its drop. Now, your long-term money is that amount that's what you anticipate not needing for five plus years and is growth-oriented because you have the time horizon to weather a bad stretch without being forced to sell out of it. And that's what Robert had in place before he retired. Not a prediction about what the market would do, not a perfect portfolio, but a structure that gave him time and flexibility, not if but when the worst case scenario actually showed up. Now, this approach, of course, doesn't eliminate all risk. Nothing does. What it does reduce is the chance that you're forced into a bad decision at the worst possible moment. Better odds and a better behavior, not a guarantee. So once you have this shock absorber framework in place, something interesting happens. The same down market that forces an unprepared retiree to sell at the bottom can create a planning opportunity for someone who's structured correctly. In fact, in the early years of retirement, before Social Security starts and RMDs begin, your taxable income may be lower than it's been in decades. If you don't need to sell that long-term money to pay bills, you may have the flexibility to convert some of that pre-tax money into Roth money while the shares are down. Yes, you're going to pay taxes, but you're paying taxes at a lower value and shuffling them into the protection of a tax-free account where they then recover. This doesn't mean that Roth conversions are automatically a good idea. They depend on your specific situation, as all this strategy does. Be sure to consult a financial professional to decide how to proceed with your retirement and tax plan. But here's the point a prepared retiree can use a down market strategically. An unprepared retiree is forced to react to it. And that's fundamentally a different position to be in. And there's one more thing I want you to take away from this. Everything we've talked about today, the shock absorber, withdrawal sequence, the bucket structure, this isn't something you build on the day you retire. It's something you need to have structured in the years leading up to it. Because think about the last time you were on a flight. You didn't want your pilot to get right above the airport and shut off the engines because, well, you've arrived, technically. You would rather have your pilot do the miles-long gradual approach to the runway, a smooth landing. And that's the same thing for retirement planning. The gradual rotation of your investments into the right positions. So by the time you stop working, your structure is already there. You're not scrambling to build it while the market is already moving against you. And heaven forbid, a market crash hits right before you retire. Because if your structure is already in place, you're not forced to push back your timeline or cut your plan short. You're still able to retire on your terms when you plan to, because the preparation was already done. I think about the contrast between Robert and Susan's scenario a lot, where they have the same money and the same market and the same decline, but Robert didn't avoid the downturn. And Susan didn't fail because she was careless or irresponsible. She had saved a significant nest egg with decades of discipline. The difference was planning and preparation. One of my favorite scriptures, in fact, is if you are prepared, you shall not fear. And that's what Robert had before the first year showed up. And Susan was just relying on the overall number. But a retirement plan is not just a number. It's supposed to be a structure that's meant to survive the years that don't go the way you expected. One of my favorite memories from last year was in April of 2025, you might recall that Trump came out with his liberation day, and there is the tariff tantrum that happened in the stock market, causing it to drop by 10% within a week or two. Very scary time. Coincidentally, I had a pre-planned review with an ongoing client who was in his 70s, and I fully expected him to start the conversation being all worried about what's going on in the market and whether he can make it, you know, pay his bills. And when I was opening the conversation, shooting the breeze, he couldn't wait to tell me that he had just booked a bucket list trip to take his son and his four grandsons to the Isle of Man motorcycle race. And he couldn't wait. I was at a loss for words, and I frankly was wondering if he was paying attention to the news recently. But the reason that memory stuck out to me was he knew that he didn't have to depend on the ups and downs of the market on a weekly, monthly basis to be able to determine if he could still take care of his needs, wants, and wishes. That's what the retirement shock absorber framework is meant to do. And if you want to see how your plan holds up against a year one drop in retirement and know which account you draw from first and whether your withdrawal sequence is intentional, click the link in the description to book a call with me, or you can scan the QR code on screen now. We build comprehensive retirement plans without requiring clients to move their investments under our management to do so. But if you're not ready for that yet, I made a case study video for you that pulls back the curtain about even more how we build retirement plans for one of our recent clients.