Sequence of returns risk in retirement: why timing matters more than average return

TL;DR: Sequence-of-returns risk is the danger that a market downturn early in retirement — while you're also withdrawing money — can permanently impair a portfolio, even if the AVERAGE return over the full retirement period ends up being perfectly reasonable. The same average return, with a bad stretch early instead of late, can mean the difference between a portfolio lasting the full retirement and running out a decade or more early.

Why average return alone doesn't tell the story

During accumulation (while you're still working and contributing), the order of good and bad market years matters relatively little — you're adding money throughout, so a downturn early in your career gives decades for the eventual recovery to compound. During retirement, this flips completely: you're withdrawing money, often at a fixed dollar amount, while the market is also doing whatever it's doing. A downturn combined with withdrawals means you're selling a larger share of a shrinking portfolio, permanently reducing how much is left to eventually recover.

A concrete illustration

Consider two retirees, both starting with a $1.5 million corpus, withdrawing $70,000/year (inflation-adjusted), over a 30-year retirement, both averaging exactly 7% annual returns over the full period. Retiree A experiences five below-average years right at the start, followed by 25 years of above-average returns to bring the overall average back to 7%. Retiree B experiences the identical five weak years, but at the END of the 30 years instead of the beginning. Despite having exactly the same average return, Retiree A's portfolio can deplete a decade or more before the 30-year horizon ends, while Retiree B's portfolio comfortably lasts the full period — because Retiree B had a larger balance intact when the weak years eventually arrived, and fewer future withdrawals still depending on it.

Why this is worse than it sounds

The unsettling part of sequence risk is that it's largely a matter of luck tied to your specific retirement date — not something you can predict or control. Two people with identical savings behavior, identical portfolios, and identical retirement ages, but who retire just a few years apart, can experience completely different sequences of returns purely based on what the market happened to do during their specific window.

What actually reduces sequence risk

• A more flexible withdrawal strategy — a fixed-percentage or guardrail approach responds to a weak market by adjusting withdrawals, rather than continuing to withdraw a fixed amount from a shrinking base.
• A cash/bond buffer for the first few years — drawing from a more stable reserve during an early downturn, rather than being forced to sell equities at depressed prices, reduces the permanent damage.
• Delaying retirement or working part-time briefly if a downturn happens to hit right as you're about to retire — even a short delay changes which years count as your "sequence."
• Reducing discretionary spending temporarily during a confirmed early downturn, rather than maintaining full withdrawals and hoping for a quick recovery.

See your own sequence risk, in real numbers

Our Retirement Income & Drawdown Report runs a direct sequence-of-returns stress test on your exact corpus and spending — the same average return, reordered — and shows you exactly how many years of difference the timing alone makes, before you ever retire.

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