Sequence of Returns Risk: The Retirement Danger Few Talk About
Here’s a fact that surprises most people: two retirees can experience the exact same average return over their retirement and end up with completely different results — one comfortable, one broke. The difference is sequence of returns risk, and it’s one of the most important ideas in retirement planning.
The core idea: order matters once you’re withdrawing
While you’re saving, the order of good and bad years barely matters — only the long-run average. But once you’re withdrawing money to live on, the order of returns matters enormously.
Why? Because if the market crashes early in your retirement, you’re selling investments to fund your spending while they’re down. Those sold-low shares are gone — they can’t recover when the market bounces back. A few bad years at the start can permanently shrink your nest egg, even if the long-run average return is perfectly fine.
A simple illustration
Imagine two people retire with the same savings, take the same inflation-adjusted withdrawals, and earn the same average return over 30 years — but in opposite order:
- Retiree A hits a few bad market years first, then good years. They’re withdrawing from a shrinking pot early, locking in losses. Their money may run out.
- Retiree B gets the good years first, building a buffer before the bad years arrive. They sail through.
Here’s a striking example. Both retirees start with $1,000,000, withdraw $40,000/year, and experience the exact same set of yearly returns (a few crash years among good ones — a 5.2% average either way). The only difference is when the crash years land:
| Crash years come… | Money after 30 years | |
|---|---|---|
| Retiree A | early (years 1–3) | $0 — ran out |
| Retiree B | late (years 28–30) | ~$2.2 million |
Same average return. Same withdrawals. One runs out of money; the other dies a millionaire — purely because of when the bad years showed up. That’s sequence of returns risk.
Why simple calculators can be optimistic
Most retirement calculators (including our retirement drawdown calculator) use a single, steady average return. That’s great for understanding the big picture, but it can’t show sequence risk, which depends on bumpy, real-world year-to-year returns. So treat a “your money lasts 35 years” result as a guideline, not a guarantee — real markets are lumpy.
How retirees manage it
You can’t control market timing, but you can reduce the danger:
- Keep a cash/bond cushion — often one to three years of spending — so you can avoid selling stocks during a downturn.
- Stay flexible: trim spending a little after bad years, spend a bit more after good ones. Flexibility dramatically improves how long money lasts.
- Don’t start too aggressive: a lower initial withdrawal rate (the classic guideline is around 4%) leaves more margin for a rough start.
- The first 5–10 years matter most. If your portfolio survives a bad early stretch, the risk fades.
The takeaway
- It’s not just what you earn in retirement — it’s the order you earn it in.
- A market crash early in retirement is the real danger, because you’re withdrawing while down.
- Protect yourself with a cash cushion, spending flexibility, and a sensible withdrawal rate.
Explore how long your savings might last in the retirement drawdown calculator — and remember to give yourself a margin of safety.
This is general education, not financial advice.