Reviewed September 2026.
Sequence of returns risk is the chance that poor market returns in the first years of retirement, combined with withdrawals, permanently shrink the portfolio more than the same average return would if the bad years arrived later. Average return over 30 years can look fine on paper while an unlucky early sequence still forces spending cuts. This page uses a simple number example.
Why order matters once you withdraw
While you are working and adding money, a dip can mean you buy more shares cheaply (Investing basics). In retirement you often sell shares for living costs. Selling after a drop locks in a lower balance; later recoveries compound on a smaller base.
Simple number example (illustrative)
Two retirees start with $500,000 and withdraw $25,000 at each year-end (5% of the start; not a universal rule). Markets differ only in order:
Retiree A: bad years first
| Year | Return | Balance before withdrawal | Withdraw | End balance |
|---|---|---|---|---|
| 1 | −20% | $400,000 | $25,000 | $375,000 |
| 2 | −10% | $337,500 | $25,000 | $312,500 |
| 3 | +15% | $359,375 | $25,000 | $334,375 |
Retiree B: same returns, reverse order
| Year | Return | Balance before withdrawal | Withdraw | End balance |
|---|---|---|---|---|
| 1 | +15% | $575,000 | $25,000 | $550,000 |
| 2 | −10% | $495,000 | $25,000 | $470,000 |
| 3 | −20% | $376,000 | $25,000 | $351,000 |
After three years, A sits near $334k and B near $351k in this toy path, and A’s gap often widens if withdrawals continue through a slow recovery. Same three returns, different order, different lasting damage. (Arithmetic is illustrative; real portfolios have dividends, taxes, and fees.)
Practical buffers people use
- Hold 1–3 years of planned withdrawals in cash or short bonds so you are not forced to sell stocks in a crash (Emergency fund; Asset allocation).
- Flex spending: cut discretionary withdrawals after a big drop year.
- Delay large one-time spends when the portfolio is down.
- Rebalance thoughtfully rather than panic-selling the entire stock sleeve (Rebalancing).
- Know when RMDs force distributions even if you prefer not to sell.
Target-date funds generally glide toward a more conservative mix as the date approaches; balanced funds typically keep a relatively fixed stock/bond mix. Neither eliminates sequence risk if withdrawals are large in a bear market.
What sequence risk is not
- Not a prediction that a crash starts the day you retire.
- Not proof that annuities or complex products are required.
- Not the same as inflation risk or longevity risk (those are separate problems).
Checklist
- Write annual withdrawal need in dollars, not only as a percent.
- Stress-test “what if stocks fall 20% in year one?”
- Keep a cash/short-bond sleeve sized to near-term withdrawals.
- Plan which spending you can cut temporarily after a bad year.
- Review allocation and withdrawal rate when markets move hard.
- Coordinate taxable account sales with tax brackets and RMDs.
Educational only. Not investment, tax, or retirement-planning advice. Markets lose value. Withdrawal rates that worked in past U.S. data can fail in future sequences.