Why the Order of Market Returns Can Permanently Damage a Texas Teacher’s Retirement Income

Most Texas teachers spend decades building toward a TRS pension. They calculate the formula, estimate their monthly check, and assume that number is safe. But for teachers who retire with outside savings — a 403(b), a personal investment account, or a supplemental retirement plan — there is a risk that most retirement conversations never address directly: sequence of returns risk.

Texas teachers can also run a full pension estimate using the Texas Teacher Retirement Calculator to better understand their retirement outlook.

Sequence of returns risk is the danger that comes from the order in which investment returns occur, not just the average return over time. A teacher who earns strong market returns late in retirement may end up in a very different position than one who earns those same returns in the first few years after leaving the classroom. When you are drawing down a portfolio to cover living expenses, a bad stretch of returns early on can permanently reduce your income, even if the market fully recovers later.

This is not a theoretical concern. It is one of the most practical and underappreciated risks facing Texas educators who retire with any personal savings to manage.

For a deeper foundation before diving into this topic, start with the Texas Teacher Retirement Planning Guide.

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Most retirement plans look solid on paper but have never been tested under real-world conditions. A projected average return of 6% or 7% annually tells you nothing about what happens if the market drops 25% in your first year of retirement and you are already drawing from that same account to pay for groceries, utilities, or healthcare. Plans built on averages frequently fall apart when sequence is the actual variable at work.

What Is Sequence of Returns Risk and Why Does It Matter for Teachers?

Sequence of returns risk describes the impact of return timing on a portfolio that is being actively withdrawn from. It is distinct from average return risk, which is simply whether an investment performs well or poorly over a long period.

For teachers still working and contributing to a 403(b) or IRA, a market downturn is painful but recoverable. Contributions continue, and time allows the portfolio to rebuild. But once a teacher retires and begins making withdrawals, the math flips. Selling shares at depressed prices to cover monthly expenses means fewer shares remain to benefit when the market recovers.

This is especially important for Texas teachers because retirement income planning is fundamentally different for teachers than it is for workers in the private sector. TRS-covered educators do not receive Social Security in most cases, which means supplemental savings often carry more responsibility than they would for a typical retiree.

How Your TRS Pension Changes the Equation

The good news is that a TRS pension provides a meaningful buffer against sequence risk — but only up to the amount it covers.

Texas TRS uses a flat 2.3% multiplier per year of service applied to your final average salary. The formula is straightforward:

Annual Pension = (Years of Service × 0.023) × Final Average Salary

A teacher with 30 years of service and a final average salary of $58,000 would receive:

30 × 0.023 × $58,000 = $40,020 per year, or about $3,335 per month

That pension arrives every month regardless of what the stock market does. It does not shrink because the S&P 500 dropped. It does not require you to sell assets at the wrong time. In that sense, it provides a floor of guaranteed income that partially insulates a retired teacher from sequence risk.

But here is the problem: for many Texas teachers, that pension does not cover all monthly expenses. The gap between pension income and actual spending must be filled — often by drawing from a 403(b), a deferred compensation account, or personal savings. That gap is exactly where sequence risk lives.

Understanding how much income your TRS pension will actually replace is the critical starting point before assessing how much exposure to sequence risk you truly have.

The Math That Shows Why Timing Hurts So Much

Consider two teachers who both retire with $300,000 in a 403(b). Both experience the same average annual return of 5% over 20 years. The only difference is the order of returns.

Teacher A experiences strong returns early and poor returns late. Her portfolio survives well past her life expectancy.

Teacher B experiences a 20% loss in year one and a 15% loss in year two before markets recover. She draws $18,000 per year to supplement her pension income. Despite recovering average returns, her portfolio runs out in year 14.

Same starting balance. Same average return. Same withdrawal amount. Different outcome — purely because of sequence.

The early losses forced Teacher B to sell shares at a discount. She had fewer shares left when markets rebounded. Her recovery never fully caught up to her withdrawal rate.

Why Early Withdrawals Are the Danger Zone

The first five to ten years of retirement represent the highest-risk window for sequence damage. During this period, the portfolio is still large enough that percentage losses translate into significant dollar losses, and the teacher has decades of withdrawals ahead of her.

Several factors compound this risk for Texas teachers specifically:

• No Social Security buffer. Most TRS-covered educators cannot rely on Social Security to absorb shortfalls. Any income gap falls on personal savings.
• Healthcare transition costs. Teachers who retire before Medicare eligibility at age 65 often face higher out-of-pocket costs. Healthcare costs in early retirement can be significantly higher than expected and increase withdrawal pressure during the most vulnerable sequence-risk years.
• Fixed lifestyle expectations. After 30 years of planning around a specific retirement lifestyle, many teachers are reluctant to adjust spending even when markets underperform.

If a teacher is also carrying debt into retirement, that compounds the problem further. Entering retirement with unresolved debt obligations raises the minimum monthly withdrawal needed and shortens the window for recovery.

What to Do Instead

Protecting against sequence risk does not require avoiding the market altogether. It requires structuring income so that short-term market downturns do not force you to sell long-term assets at the wrong time.

Here are specific strategies that apply to Texas teachers:

• Build a cash buffer before retiring. Having one to two years of living expenses in cash or stable equivalents means you can avoid selling investments during a downturn in the first years of retirement. You draw from the buffer, not the portfolio, until markets recover.
• Identify your true income gap. Calculate exactly how much your TRS pension covers versus what you actually spend monthly. The smaller that gap, the less exposure you have to sequence risk.
• Delay supplemental withdrawals when possible. If your pension plus any earned income covers your basic needs for a year or two post-retirement, giving your portfolio time to grow before drawing from it significantly reduces sequence risk exposure.
• Use a bucket strategy for your 403(b). Segment your savings into short-term stable assets and long-term growth assets. Draw from the stable bucket during downturns. Refill from growth when markets recover.
• Stress test your plan against a bad sequence. A plan that works under average returns may fail badly under a realistic worst-case sequence. If you have never tested your numbers under a 2008 or 2020-style scenario in your first year of retirement, you do not actually know how safe your plan is.

How to Make the Right Decision for Your Situation

Path 1: Your pension covers 90% or more of monthly expenses

When it applies: Long-service teachers with 30+ years and a relatively modest lifestyle compared to their final salary.

What to consider: Your sequence risk exposure is low. Your primary concern is inflation eroding the real value of your fixed pension over time.

What could go wrong: Assuming you are fine without stress-testing healthcare and inflation scenarios over a 25-to-30-year retirement horizon.

Path 2: Your pension covers 60% to 80% of expenses

When it applies: Most Texas teachers with 25 to 30 years of service at average salary levels.

What to consider: You have meaningful sequence risk exposure. The gap you fill with savings is large enough that early market losses could force painful adjustments.

What could go wrong: Retiring without a cash buffer or withdrawal strategy, especially if a market downturn hits in years one through three of retirement.

Path 3: Your pension covers less than 60% of expenses

When it applies: Teachers with fewer years of service, those who worked part-time, or those with higher lifestyle costs relative to their salary history.

What to consider: This is the highest-risk category. Your supplemental savings must work harder, and your exposure to sequence damage is significant.

What could go wrong: Running out of savings before age 80 if a bad sequence of returns hits early and withdrawals never decrease to match.

Path 4: You are retiring within three years and markets are volatile

When it applies: Teachers approaching the retirement decision during a period of market uncertainty.

What to consider: This is the highest-stakes window. Decisions made about retirement timing, asset allocation, and withdrawal sequencing in this window have outsized long-term consequences. Read more about what happens if you retire during a market downturn.

What could go wrong: Locking in a retirement date without adjusting your portfolio allocation to reduce near-term volatility exposure.

Path 5: You have significant non-retirement assets like home equity

When it applies: Teachers with paid-off or nearly paid-off homes who have flexibility in how they access capital.

What to consider: Home equity can act as a buffer, either through downsizing or a strategic sale. Exploring whether downsizing in retirement makes sense for your situation could reduce the withdrawal pressure on your investment portfolio during a bad sequence period.

What could go wrong: Over-relying on home equity as a fallback without a concrete plan for accessing it efficiently.

Quick Self-Check Before You Move Forward

Before finalizing any retirement timeline or income plan, answer these five questions honestly:

• Do you know exactly what your monthly TRS pension will be, and does that number cover your baseline monthly expenses without touching savings?
• If the market dropped 25% in your first year of retirement, could you avoid selling any investment shares for at least 12 months?
• Have you accounted for healthcare costs between your retirement date and Medicare eligibility at age 65?
• Does your current withdrawal plan assume an average rate of return, or has it been tested against a realistic bad-sequence scenario?
• Do you know your actual monthly spending number — not an estimate, but the real figure — so you can calculate your true income gap?

If you cannot answer yes to each of these with confidence, there are gaps in your plan that need to be addressed before you finalize your retirement date.

Why Most Teachers Discover These Gaps Too Late

The most common pattern in teacher retirement planning is not catastrophic failure — it is quiet erosion. A teacher retires, feels financially comfortable for the first few years, and then notices that her savings are shrinking faster than expected. By the time the problem is clear, options are limited.

A bad sequence of returns in years two and three can permanently reduce a portfolio’s capacity to generate income. That damage cannot be undone by returning to work at 68 or hoping markets improve at 74. The compounding effect of drawing down a damaged portfolio over decades works against recovery.

The teachers who navigate this well are the ones who tested their assumptions before retiring — not after. They knew their income gap, had a cash buffer in place, and had a plan for what to do if markets dropped in the first few years. The ones who struggle are the ones who projected average returns, assumed the pension would be enough, and never stress-tested the plan under adverse conditions.

Common Questions Texas Teachers Ask

Does my TRS pension protect me completely from sequence of returns risk?

Partially. Your TRS pension provides guaranteed income that does not fluctuate with market performance. But if your pension does not cover all your expenses, the portion you must withdraw from savings is still exposed to sequence risk. The larger the income gap, the greater your exposure.

Should I delay retirement to reduce sequence risk?

Not necessarily, but timing matters. Retiring during a market downturn with no cash buffer is a higher-risk scenario than retiring during a stable or rising market with reserves in place. The decision should be based on your income gap, buffer size, and overall financial position — not fear alone.

How is sequence risk different from just having a bad investment year?

A bad investment year while you are still working is recoverable because you are not withdrawing and you continue contributing. A bad year in early retirement is different because you are selling assets to fund expenses during the downturn. That reduces the shares available to benefit from recovery, which permanently shrinks your portfolio’s long-term capacity.

Does this apply to my 403(b) or just taxable accounts?

Sequence risk applies to any account you are actively drawing from. Whether it is a 403(b), a 457(b), an IRA, or a personal brokerage account — if you are making regular withdrawals, the order of returns matters.

What if I have a mix of TRS pension income and Social Security?

Most Texas public school teachers do not receive Social Security due to participation in TRS. If you worked in a Social Security-covered position before or alongside teaching, you may have some benefit, but WEP and GPO rules may reduce it. Confirm your Social Security status with SSA directly before building it into your income plan.

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Get Your TRS Analysis

Sequence of returns risk is manageable — but only if you plan for it before you retire, not after you notice your savings shrinking. A TRS analysis that accounts for your income gap, withdrawal timing, and retirement date can show you where your current plan holds up and where it does not.

Get Your TRS Analysis