Sequence-of-Returns Risk: Why the Order of Returns Matters in Retirement
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In short
Sequence-of-returns risk is the danger that poor investment returns arrive early in retirement, just as you begin withdrawing money. Two retirees can earn exactly the same average return over the same years — but if one gets the bad years first while both are making withdrawals, that retiree can end up dramatically worse off.
During your saving years, the order of returns barely matters. The moment withdrawals begin, it matters enormously. This is the risk that makes the transition into retirement the most financially sensitive period of an investing life.
Here's why order suddenly matters, the arithmetic that drives it, and the approaches commonly described for softening it.
Why order doesn't matter — until it does
While you're accumulating and not touching the money, returns simply multiply together, and multiplication doesn't care about order: a −20% year followed by a +25% year lands you in exactly the same place as the reverse. Average out the same, end up the same. But withdrawals break that symmetry. When you sell a fixed amount after a bad year, you're selling a larger share of a shrunken portfolio — those shares are gone and can't participate in the recovery. The withdrawal converts a temporary paper loss into a permanent one. Bad years early in retirement, when the pot is at its largest and withdrawals have just begun, therefore do damage that identical bad years arriving later would not.
Worked example: same average return, $23,625 apart
Two retirees each start with $500,000 and withdraw $25,000 at the end of each year. Over three years their portfolios deliver the same three returns — −20%, +10%, +25% — just in opposite orders. Both experience an identical 5% average return.
Rita (bad year first): −20%, then +10%, then +25% → ends with $459,375.
Sam (bad year last): +25%, then +10%, then −20% → ends with $483,000.
Same starting pot, same withdrawals, same average return — and Sam finishes $23,625 ahead, purely because his loss arrived after two years of growth had enlarged his base, while Rita's loss hit first and every subsequent withdrawal came out of a diminished portfolio.
The control case makes the point sharper: with no withdrawals, both sequences end at exactly $550,000. The order alone did nothing — it was the combination of early losses and withdrawals that created the gap. Stretch this from three years to a thirty-year retirement, and the same mechanism can be the difference between a portfolio that lasts and one that runs out.
When the risk is highest
The danger zone is the span around the retirement date — roughly the final working years and the first decade of withdrawals. Before it, there are no withdrawals to lock in losses and plenty of time to recover; long after it, much of the withdrawal journey is already safely behind. In the middle, the portfolio is at its lifetime maximum (so losses are largest in dollar terms), withdrawals have just begun (so losses start being crystallised), and the remaining horizon is still long (so the shrunken base has decades of withdrawals still to support). Note the asymmetry with the previous article: during accumulation, time in the market dominates and volatility along the way is mostly noise; at the withdrawal transition, when the volatility lands becomes a first-order question.
Approaches commonly described for softening it
Sequence risk can't be eliminated — nobody controls what markets do in their first retirement years — but retirement literature describes several ways its impact is commonly managed. These are frameworks to understand, not recommendations:
- A cash-and-safe-assets buffer. Holding one or more years of planned spending in safe, liquid assets so that bad-year withdrawals can come from the buffer instead of selling depressed investments — giving the portfolio room to recover.
- Flexible withdrawals. Trimming withdrawal amounts after bad years rather than taking a fixed amount regardless. Even modest flexibility significantly reduces the damage, because it shrinks exactly the sales that hurt most. (The next article, on withdrawal strategies, goes deeper.)
- Diversification and a glide path. Entering the danger zone with a diversified mix that isn't fully exposed to a single market's crash — many retirement approaches gradually reduce portfolio risk approaching the retirement date for precisely this reason.
What unites them: each is a way of not being forced to sell a lot after a crash. That's the entire game with sequence risk.
Frequently asked
5 questions
What is sequence-of-returns risk?
The risk that poor investment returns arrive early in retirement, just as withdrawals begin. Because withdrawing after losses sells a larger share of a shrunken portfolio, early bad years combined with withdrawals can permanently reduce how long a portfolio lasts — even when the long-run average return turns out fine.
Why doesn't the order of returns matter before retirement?
Without withdrawals, returns simply multiply together, and multiplication is order-indifferent — a bad year then a good year ends in the same place as the reverse. Withdrawals break that symmetry: selling after a loss locks part of it in, so once withdrawals start, order matters greatly.
When is sequence risk most dangerous?
In the years just before and the first decade after the retirement date — when the portfolio is at its largest, withdrawals are starting, and there are still decades of spending left to fund. Losses in that window do more lasting damage than identical losses earlier or later.
Can sequence risk be avoided entirely?
No — no one controls which returns their first retirement years deliver. What retirement literature describes are ways to soften the impact: cash buffers so depressed assets needn't be sold, flexible withdrawals that shrink after bad years, and diversified portfolios entering retirement. Each reduces forced selling after losses.
Does sequence risk mean I shouldn't invest near retirement?
Not investing carries its own risks — inflation eroding cash, and the portfolio failing to grow across what may be decades of retirement. Sequence risk argues for managing how a portfolio meets the withdrawal years, not for abandoning investment. How to balance that is an individual matter, potentially with professional guidance.
References
- U.S. Securities and Exchange Commission — Beginners' Guide to Asset Allocation, Diversification, and Rebalancing (investor.gov) (accessed 2026-08-13)
- Financial Industry Regulatory Authority (FINRA) — Financial Foundations (accessed 2026-08-13)
Educational and informational only — not investment advice, a recommendation, or an offer to buy or sell any security. Investing involves risk, including the possible loss of principal. Worked examples use fictional companies and figures.