For decades, the 4% rule has been a golden standard for many retirement planners. Take your annual spending, multiply by 25 and, at least on paper, you’re set for retirement. Want $10,000 a month? That’s $120,000 a year, or roughly $3 million in savings.
Simple, but also potentially misleading. Mostly because the 4% rule is based on an assumption about the long-term average return of the stock market and overlooks the risk of sequence of returns.
In other words, if your retirement plan hinges on this back-of-the-napkin math, you’re leaving yourself vulnerable to sudden and dramatic swings in the market. If you experience a bad market downturn early enough in your retirement, it could derail the rest of your journey. Here’s why.
MassMutual describes the sequence of returns risk as an “overlooked and misunderstood problem for retirees” (1).
In simple terms, this is the risk that a market downturn hits you early in retirement, while you’re also compelled to withdraw from your portfolio during this downturn. The combined impact of withdrawing from a beaten-down portfolio leaves you with permanently less capital to depend on for the rest of your retirement.
Let’s say you retire with precisely $3 million and want to withdraw 4% of this every year. Unfortunately, your portfolio is entirely invested in the stock market which declines 20% in the first year of your retirement. By the end of the year, your nest egg has shrunk to $2.4 million.
You’ve also withdrawn $120,000 during this year, so your nest egg has shrunk further, down to $2.28 million.
This first year loss is a permanent scar on your portfolio. Even if the market normalizes and delivers a steady and reliable 7% annual return beyond this point, your portfolio would be worth only $2.75 million by the tenth year, still below your starting point. Also, you’ve breached the 4% rule of thumb every year during this period. This is why sequence of returns risk can be such a hidden trap.
Fortunately, there are ways to combat this risk if you plan ahead.
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If you’re looking to spend $10,000 a month without worrying about the stock market, there are three ways to mitigate the sequence of returns risk.
The first step is to maximize guaranteed income. For many seniors, this is simply their Social Security benefits. In 2022, Social Security checks accounted for more than half of total income for at least 63.2% of beneficiaries, according to the Pew Research Center, citing U.S. Census Bureau data (2). As of January, 2026, the average monthly payout is $2,071, according to the Social Security Administration (3).
In other words, this guaranteed source of income should allow you to meet a portion of your $10,000 monthly needs without market risk.
The second way to combat the sequence of returns risk is to plan with a margin of safety. For instance, if you expect to collect $2,000 a month from Social Security and $8,000 in withdrawals from your portfolio, the rule of 4% would suggest you need a nest egg worth $2.4 million. Aiming for 15% more, $2.76 million, should give you a comfortable buffer to withstand market turmoil and unexpected losses.
In other words, you can stay below the 4% withdrawal rule and worry less about market crashes if you save a little more than you actually need.
Finally, organize your retirement income into buckets instead of thinking of your portfolio as a single monolith. Perhaps the most effective way to minimize the sequence of returns risk, this strategy, suggested by U.S. Bank Wealth Management, is based on creating different buckets for short-term, medium-term and long-term needs (4).
For instance, you can keep some cash in highly liquid money market funds for day-to-day spending, while investing in robust bonds, government treasuries and fixed-income assets to meet spending needs for the next four or five years. The rest can be invested in the stock market for long-term needs, which gives your money more time to recover from any downturns, uninterrupted by any withdrawals.
A combination of these three strategies should help you spend $10,000 a month in retirement without any stress about the S&P 500 or recessions.
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MassMutual (1); Pew Research Center (2); Social Secuirty Administartion (3); (4)
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.