Sequence-of-returns risk: why the order of your returns matters more than the average
TL;DR: Average return doesn't determine retirement outcomes on its own — the order those returns happen in does, because withdrawals made during down years permanently lock in losses that a portfolio doesn't fully undo when markets recover. This is sequence-of-returns risk, and it's specifically a withdrawal-phase problem, not an accumulation-phase one.
The counterintuitive part
During accumulation (while you're still contributing), the order of returns barely matters — a bad year early on actually helps, since you buy more units at a lower price with the same contribution. Once you start withdrawing a fixed amount, that flips completely: a bad year early in retirement forces you to sell more units for the same dollar amount, permanently reducing what's left to grow when the market recovers.
Why "average return" hides this entirely
Two portfolios with identical average annual returns over 20 years — say, one that starts with several down years and recovers, another that starts strong and ends with a decline — can produce dramatically different ending balances for someone withdrawing from them, purely due to timing. A retirement plan based only on an average expected return misses this risk completely.
What actually reduces sequence-of-returns risk
- A cash or bond buffer for the first few years of retirement, reducing the need to sell equities during a downturn.
- Spending flexibility — the ability to reduce withdrawals temporarily during a bad market year rather than withdrawing a fixed amount regardless.
- Delaying retirement slightly if a crash happens right before your planned date, giving the portfolio time to recover before withdrawals begin.
Test your own plan against this specific risk
Our Retirement Crash Stress Test runs your exact portfolio and spending plan through a crash at multiple different timings — before retirement, year 1, and later — so you can see sequence-of-returns risk applied to your own numbers, not a generic example.
Frequently asked questions
What is sequence-of-returns risk?
The risk that the order in which investment returns occur — not just their average — determines how long a retirement portfolio lasts, because withdrawals during down years permanently reduce the shares available to benefit from a later recovery.
Does sequence-of-returns risk matter before I retire?
Not much — during accumulation, a down year is actually beneficial since you buy more at lower prices with the same contribution. The risk is specific to the withdrawal phase.
How can I reduce sequence-of-returns risk in retirement?
Common approaches include keeping a cash or bond buffer for the first few retirement years to avoid selling equities during a downturn, and building in spending flexibility to reduce withdrawals temporarily during a bad market year.
Can two retirees with the same average return have different outcomes?
Yes — if one experiences down years early in retirement and the other experiences them later (with an otherwise identical average return over the full period), their ending balances can differ substantially due to the timing of withdrawals.