For many newly minted retirees, dreams of an idyllic retirement have been quickly replaced with the harsh reality of penny-pinching and sleepless nights worrying about declining retirement balances.

Last year, the highest inflation in a generation followed by aggressive Federal Reserve interest-rate hikes to curb it caused both stock and bond markets to plunge, leaving people defenseless to protect their nest eggs.

Typically, stocks and bonds move in opposite directions, which limits the damage in a diversified portfolio. In 2022, though, the S&P 500 lost almost 20% while bonds had their worst year ever, with the Bloomberg Aggregate Bond index shedding 12.5%.

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This year began with markets rising again, as inflation showed signs of cooling, consumers remained resilient and jobs stayed plentiful even after 450 basis points of rate increases and predictions of more to come. But those encouraging signs have been replaced by worries about bank runs and the risk they could derail Fed plans to slow down stubbornly high inflation and the economy.

“It feels like a perfect storm is brewing,” said Max Jaffe, CPA and chartered retirement planning counselor at TBS Retirement Planning.

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What is this ‘perfect storm’?

The Federal Reserve estimated that 2.6 million more Americans than usual retired in the past year or so due partly to pandemic-related health concerns and bloated retirement accounts as asset values rallied to record highs. But that set people up for “the perfect storm,” or formally called in industry speak “sequence of returns risk,” when markets tanked.

Studies show the order and timing of poor investment returns can have a big impact on how long your retirement savings last. The worst time to retire is at a market peak because when stock prices revert to their long-term averages, retirees find themselves scrambling.

“A big loss in the first year of retirement – it's really hard to recover from that,” said Wade Pfau, founder of Retirement Researcher and author of "Retirement Planning Guidebook." And the hole gets even deeper if markets decline by double digits again this year and you must tap the funds each year to live.

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Example:

• If you have $1 million in retirement funds, and you take out $40,000 annually to live. After the first year, you have $960,000, but the market drops 50%. You now have less than $500,000. “Most people will outlive that,” Jaffe said.

• It would take a 7% annual return for more than 10 years to double your money again, but only if you don’t draw from the account during that time. If you tap your portfolio as it's losing value, you’ll have to sell more investments to raise a set amount of cash. Not only will that drain your savings more quickly, but it also leaves you with fewer assets that can generate growth and returns during potential future recoveries.

• By contrast, if a decline occurs later in your retirement, you may not need your portfolio to last as long or continue growing to fund a long retirement, so you may be in much better shape to fund withdrawals. That’s why the sequence, or order, of returns, is important in retirement.