The Hidden Costs of "Buy and Hold" for Retirees Drawing Income

Why the usual accumulation playbook can break down once a portfolio has to fund a retirement paycheck

June 13, 2026

Buy and hold is one of the great ideas in investing. For a long-term saver who is adding money every month, low-cost passive exposure, broad diversification, and patience solve a lot of problems. Volatility is uncomfortable, but it is not automatically destructive. A bear market in your 40s can even help future returns if you are still contributing and buying shares at lower prices.

Retirement changes the math. The moment a portfolio has to send money out instead of taking money in, the order of returns starts to matter. This is sequence-of-returns risk: the danger that poor investment returns early in retirement, paired with regular withdrawals, permanently damage the portfolio's ability to recover. Schwab describes the issue plainly: when a retiree taps a portfolio while it is falling, they must sell more investments to raise the same cash, leaving fewer assets to participate in the eventual rebound. ¹

That is the hidden cost of "buy and hold" for retirees. The cost is not simply market volatility. It is the combination of volatility and forced distributions. A strategy that is perfectly reasonable during accumulation can become incomplete during distribution because the retiree no longer has unlimited time, unlimited flexibility, or a paycheck replenishing the account.

The traditional retirement-income conversation often starts with the 4 percent rule. William Bengen's original work, published in 1994, found that a 4.15 percent initial withdrawal rate from a tax-advantaged account had historically allowed a portfolio to last at least 30 years, with later withdrawals adjusted for inflation. Bengen has emphasized that this was based on historical return and inflation data, not a Monte Carlo model, and that the 4.15 percent result was tied to a particularly difficult 1968 retirement cohort. ²

The key lesson is not that every retiree should mechanically withdraw 4 percent. The real lesson is that the early years matter. A retiree can experience a solid long-term average return and still have a poor retirement outcome if the weak years arrive first. The opposite is also true: a retiree who receives strong returns early can often survive a later bear market because the portfolio has had time to compound before the bad years arrive.

During accumulation, the investor's cash flow works with volatility. Contributions buy more shares when markets fall. During distribution, cash flow works against volatility. Withdrawals sell shares when markets fall. It is like trying to drain a swimming pool while the water level is dropping from a leak. The amount of water removed matters, but the timing of the leak matters too.

Let's look at a simple example using the actual annual S&P 500 total returns from 1998 through 2008, as reported in Aswath Damodaran's historical return data. The period is useful because it contains almost everything a retiree fears: the final years of the 1990s bull market, the 2000-2002 bear market, the recovery from 2003 through 2007, and the 2008 financial-crisis decline. ³

Now we reverse the returns. Same 11 annual returns. Same time period. Same starting balance. Same withdrawal amount. The only difference is the order in which the returns arrive. Figure 1 shows the two return paths. In the first path, the retiree starts in 1998 with a bull market, then faces the 2000-2002 bear market and the 2008 decline later. In the second path, the retiree starts with the 2008-style bear market and receives the stronger years later.

Assume both retirees begin with $1,000,000. Each withdraws $60,000 at the beginning of each year. We ignore taxes, fees, inflation adjustments, and asset allocation for simplicity; the point is to isolate the effect of return order. If neither retiree took withdrawals, both return sequences would end in exactly the same place because multiplication is commutative. The 1998-2008 S&P 500 total-return sequence compounded to a cumulative gain of about 11.9 percent, or roughly 1.0 percent annualized. ³

But retirees do take withdrawals. Figure 2 shows the result. The retiree who receives the bull market first finishes 2008 with about $558,587 after taking $660,000 of cumulative withdrawals. The retiree who receives the same returns in reverse finishes with about $213,924. Same starting portfolio. Same market returns. Same withdrawal amount. Different order. Different outcome. The gap is roughly $344,663.

The first-year difference explains the whole problem. In the bull-first path, the retiree withdraws $60,000, earns 28.34 percent on the remaining balance, and ends year one with about $1.21 million. In the bear-first path, the retiree withdraws the same $60,000, then loses 36.55 percent, and ends year one with about $596,430. From that point forward, the second retiree is trying to fund the same lifestyle from roughly half the capital base.

This is why averages can be misleading. The average return was not different. The cumulative return was not different. The withdrawal need was not different. The outcome was different because the portfolio had to sell assets while the market was down. Once shares are sold to fund spending, those shares are no longer there to participate in the recovery.

Figure 1: The actual 1998-2008 S&P 500 total-return sequence versus the same annual returns reversed.

Figure 2: Same starting balance and same withdrawals, but the bear-first retiree finishes with far less capital.

Buy and hold answers one question very well: how should a long-term investor behave when markets are volatile and there is no immediate need to sell? The answer is usually to stay invested, keep costs low, avoid emotional trading, and let compounding do its work.

That is not the same question a retiree is asking. A retiree drawing income is asking: how do I fund spending for the next 12 months without permanently impairing the next 25 years? That is a different problem. It requires a cash-flow strategy, not just an investment philosophy.

A pure buy-and-hold approach can miss four things in retirement. First, it may not define which assets should be sold for income during a drawdown. Second, it may not keep enough short-term reserves to avoid selling growth assets at depressed prices. Third, it may not adjust the risk level as the client moves from saving to spending. Fourth, it may ignore tax timing, account location, Roth conversion windows, and the order in which taxable, IRA, and Roth assets should be used.

None of this means passive investing is wrong. I believe passive, low-cost investing is often the right default during the accumulation years. The problem is that retirement is not just a smaller version of accumulation. It is a different phase with different risks. A portfolio that has to produce income needs a plan for the bad sequence before the bad sequence arrives.

At Perissos, we call this the Investment Lifecycle. The basic idea is simple: the investment strategy should evolve as the client's job changes from building capital to preserving capital and funding income.

In the accumulation years, the strategy can be heavily passive and cost-conscious. The client has time, wages, and recurring contributions. Broad market exposure, disciplined rebalancing, and low expenses are powerful advantages. A market decline is painful on paper, but it is not usually a cash-flow crisis because the client is still earning and contributing.

As the client gets closer to retirement, the strategy has to adapt. Five to ten years before the planned retirement date, the central question becomes less about maximizing expected return and more about controlling the damage from an early-retirement drawdown. We still want growth. Inflation and longevity require it. But we want growth inside a structure that can survive distributions during a bear market.

In retirement, the strategy becomes more active in the areas that matter for capital preservation. That does not mean market timing for its own sake, chasing short-term predictions, or abandoning passive building blocks. It means actively managing the risk budget, actively coordinating withdrawals, actively maintaining liquidity, actively rebalancing, and actively deciding where income should come from when markets are stressed. Figure 3 summarizes this shift.

The practical tools can include a cash or short-term reserve for near-term distributions, a more deliberate bond allocation, a rules-based rebalancing process, flexible withdrawal guardrails, tax-aware distribution sequencing, and a willingness to reduce risk when the plan cannot absorb a large drawdown. The mix is client-specific. A household with pensions and modest portfolio withdrawals can carry a different risk profile than a household funding most of retirement from the portfolio.

The point is not to be active because active sounds sophisticated. The point is to be active where the client's risk has become path-dependent. During accumulation, the question is mostly "what is the expected return over the next 20 or 30 years?" During retirement, the question becomes "what happens if the bad years arrive while we are taking money out?" Those are not the same question.

Figure 3: Perissos Investment Lifecycle: the portfolio objective shifts as the client moves from saving to spending.

If you are still accumulating, the best answer may still be boring in the best sense: save aggressively, diversify broadly, keep costs low, avoid unnecessary turnover, and let time do the heavy lifting. Passive investing fits that phase well because the client is not usually being forced to sell assets to fund living expenses.

If you are approaching retirement or already drawing income, the plan needs more structure. How much of your spending will come from the portfolio before Social Security, pensions, rental income, or business-sale proceeds begin? How many years of withdrawals can be funded without selling equities after a major decline? Which account should generate the next dollar of income? How would the plan change after a 20 percent or 30 percent market decline? Those are the questions that matter.

This is also where planning and investment management have to be connected. A withdrawal decision can change a tax projection. A Roth conversion can change future RMDs. A cash reserve can change the amount of equity risk the portfolio can tolerate. A Social Security claiming strategy can either reduce or increase portfolio withdrawals in the early years. None of these decisions live in isolation. This piece is educational; the specifics should be coordinated with Perissos, your CPA, and any other professionals involved in your plan.

The takeaway is that "buy and hold" is a useful discipline, but it is not a complete retirement-income system. The closer a client gets to living on the portfolio, the more the strategy has to respect sequence risk. The portfolio still needs growth. It also needs a defense.

The hidden cost of buy and hold in retirement is not that markets go down. Markets have always gone down. The hidden cost is being forced to sell during the wrong part of the cycle and then asking a smaller portfolio to recover while it is still sending out income.

That is why we think in terms of an Investment Lifecycle. Passive, low-cost investing can be an excellent accumulation strategy. As retirement approaches, the plan should adapt toward capital preservation, income durability, and tax-aware distribution. The strategy should match the phase of life the money is serving.

Our team will continue helping clients stress-test their retirement-income plans against difficult return sequences before they happen. The goal is not to predict the next bear market. The goal is to build a plan that does not depend on getting lucky with the order of returns.

All my best,

Brandon VanLandingham, CFA, CMT, CFP

Founder / CIO

1. Charles Schwab, "What Is Sequence-of-Returns Risk?" January 30, 2026, https://www.schwab.com/learn/story/timing-matters-understanding-sequence-returns-risk. 2. William P. Bengen, "The 4% Rule," https://www.bengenfs.com/the-4-percent-rule/. 3. Aswath Damodaran, NYU Stern School of Business, "Historical Returns on Stocks, Bonds and Bills: 1928-2025," updated January 5, 2026, https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html.

This piece is educational. It is not legal, tax, or accounting advice and is not a recommendation to take or refrain from any specific action. Tax law is fact-specific and changes regularly. Please coordinate any decisions discussed here with your attorney, your CPA, and Perissos before acting.

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