Dr. Wade Pfau explains four ways to beat sequence of return risk and turn your retirement savings into retirement income.
For most of your working life, retirement planning feels relatively straightforward.
You save. You invest. You grow your portfolio.
But as Dr. Wade Pfau explains, retirement doesn’t just flip that process in reverse. It changes the entire equation.
Pre-retirement, you’re adding money into your portfolio. Market downturns can actually help because you’re buying more shares at lower prices.
In retirement, the opposite is true.
“When you’re taking a distribution from your assets and the markets are down… you have to sell more shares,” Dr. Pfau explains, “and that creates dynamics that can dig a hole for the portfolio.”
That shift—from accumulation to distribution—is what makes retirement income planning fundamentally different.
The Risks Change in Retirement
One of the biggest insights from the conversation is that retirement introduces a new set of risks that don’t show up the same way while you’re working.
Dr. Pfau highlights three major ones:
Retirees often experience about 10% of their spending as unexpected each year.
In other words, surprises aren’t rare. They’re part of the plan.
And that means your retirement strategy needs to account for them.
Sequence of Returns Risk: The Hidden Danger
One of the most important—and least understood—risks in retirement is sequence of returns risk.
This is the idea that when market returns happen matters just as much as how much you earn overall.
Dr. Pfau explains it this way:
If markets perform poorly early in retirement, your portfolio can be permanently damaged—even if returns are strong later.
“If markets do poorly early on… you start to dig a hole from your portfolio,” he says.
In fact, he estimates that for a 30-year retirement, the first 10 years of returns can determine about 80% of the outcome.
That’s a completely different way of thinking about risk.
It’s not just about average returns anymore.
Why There’s No “One Right Way”
With all these risks, many retirees want a simple answer:
What’s the best strategy?
But Dr. Pfau pushes back on that idea.
“There’s not going to be the case that there’s just one optimal approach,” he explains. “You’ve got to find the approach that’s right for you.”
That’s where his concept of retirement income styles comes in.
Most retirees, in reality, use a combination of these approaches—whether they realize it or not.
If you have Social Security, investments, and a savings account, you’re already using multiple strategies at once.
The goal isn’t to pick one.
It’s to align your approach with what you’re trying to accomplish.
The Real Question: What Are You Solving For?
One of the most important questions I ask clients is simple:
What are you solving for?
Interestingly, retirees often say they want to enjoy their money—but their behavior suggests something different.
Dr. Pfau notes that many retirees continue to grow their assets instead of spending them, even when they have the ability to enjoy more of their retirement.
That disconnect can lead to a retirement that looks successful on paper—but doesn’t feel that way in real life.
Why Traditional Investing Falls Short
Another key insight comes from the origin of modern investing theory itself.
Wade points out that Modern Portfolio Theory was designed for institutions—not retirees.
When its creator, Harry Markowitz, later considered how it applies to households, he realized the problem is much more complex.
Households don’t just grow assets.
They have to fund spending—over an unknown time horizon.
That’s a completely different challenge.
Building a Real Retirement Plan
Dr. Pfau’s framework begins with two critical steps:
From there, you can begin building a plan that aligns your income, investments, taxes, and goals.
But that brings us to step zero of the 5 step retirement plan:
Because how long your retirement lasts—and how you feel about that uncertainty—affects every decision that follows.
The Bottom Line
Retirement isn’t just about having enough money.
It’s about turning that money into income—while managing risks that didn’t exist before.
That’s why retirement income planning is more complex than saving for retirement.
And it’s why the best plans aren’t built around a single strategy.
They’re built around you.
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Jeremy Keil, CFP®, CFA is a retirement financial advisor with Keil Financial Partners, author of Retire Today: Create Your Retirement Income Plan in 5 Simple Steps, and host of the Retirement Today blog and podcast, as well as the Mr. Retirement YouTube channel.
Jeremy is a contributor to Kiplinger and is frequently cited in publications like the Wall Street Journal and New York Times.
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