Sequence of returns risk, explained with real numbers

TL;DR: Sequence-of-returns risk means the ORDER your investment returns arrive in matters, not just their average — a bad stretch of returns right before or right after you stop contributing (and start withdrawing) can leave you with meaningfully less money than the same average return arriving in a different order, especially near retirement when your balance is largest.

A concrete illustration

Imagine two people who both average the exact same annual return over 10 years, contributing the same monthly amount — but one experiences their weakest years first and strongest years last, while the other experiences the exact opposite order. Despite an identical average return, their ending balances differ, sometimes substantially — because the weak years hit a smaller balance in one case and a larger balance in the other, and percentage losses on a larger balance mean more absolute rupees/dollars lost.

Why this matters most right around retirement

During the accumulation years (while you're still contributing), your balance is smaller, so a bad stretch does less absolute damage and you have time to recover before you need the money. Right around when you stop contributing and potentially start withdrawing, your balance is at its largest — a downturn at exactly this point does the most damage, and if you're also withdrawing during a downturn, you're selling more units at depressed prices to fund the same withdrawal, compounding the damage further.

What most simple retirement calculators miss

A calculator that projects "12% average annual return, compounded" is implicitly assuming a smooth, constant-order return path that real markets never actually deliver. It will tend to look more optimistic than a calculation that accounts for the possibility of a bad stretch landing at the worst possible time — which is exactly the scenario that has derailed real retirement plans historically.

What actually reduces this risk

• A glide path — gradually shifting from equity toward more conservative holdings in the final years before retirement, rather than staying fully invested in equity right up to the point you need to withdraw
• Flexibility in withdrawal amount — being able to reduce withdrawals during a market downturn rather than a rigid fixed amount
• A cash/bond buffer — holding a few years of expenses in something that doesn't need to be sold at a bad price during a downturn, so you're not forced to sell equity into weakness

See this risk illustrated for your own numbers

Our Retirement & FIRE Readiness Report includes a direct sequence-of-returns illustration — the exact same set of returns, reordered, showing how much your ending corpus could differ purely from timing, not from anything you did differently.

Frequently asked questions