Comparison
What is sequence-of-returns risk?
Sequence-of-returns risk is the danger that bad markets arrive early in retirement, while you’re withdrawing. Same average return, different order, very different outcome.
After 30 years, the real order left nothing (it ran out in year 21). The same years in reverse order left $1,437,572.
- Actual order, 1966–1995
- Same years, reversed
- Steady 4.1% a year
A simple example: same seven returns, opposite order
| Year | Bad years first | Balance | Good years first | Balance |
|---|---|---|---|---|
| Year 1 | -15% | $807,500 | +8% | $1,026,000 |
| Year 2 | -10% | $681,750 | +20% | $1,171,200 |
| Year 3 | +5% | $663,338 | +18% | $1,323,016 |
| Year 4 | +12% | $686,938 | +12% | $1,425,778 |
| Year 5 | +18% | $751,587 | +5% | $1,444,567 |
| Year 6 | +20% | $841,904 | -10% | $1,255,110 |
| Year 7 | +8% | $855,257 | -15% | $1,024,344 |
Both retirees start with $1,000,000, take $50,000 a year, and earn exactly the same returns. Ending gap: $169,087.
What this means
Over 1966–1995, a 60% stock mix averaged 4.1% a year after inflation. Run in the order it actually happened, the plan ran out in year 21. Run backward, with exactly the same returns, it ended with $1,437,572.
The real first decade was weaker than the last (-1.8% vs 9.2% a year after inflation), so withdrawals ate into savings while prices were low and those dollars never got to recover. This is sequence-of-returns risk: the early years of retirement matter most.
You can’t pick your start year, but you can plan for a bad one: keep a few years of withdrawals out of stocks, or agree in advance to small spending cuts if markets fall early.
The short version
While you’re saving, the order of your returns doesn’t change where you end up. Once you start withdrawing, it does. Selling investments to pay bills during a downturn turns a temporary loss into a permanent one, because those shares aren’t there for the recovery.
So two retirees with identical savings, spending and average returns can end up decades apart, purely because one met the bad years first.
Why it’s worst early in retirement
Early on, your savings are at their largest and you have the most years left to fund. A crash then shrinks the base that every future withdrawal comes from. The same crash 20 years in affects a smaller balance and fewer remaining years.
How retirees manage it
- Guardrails: trim spending modestly after big drops, so you sell less at low prices.
- A cash bucket: hold a few years of withdrawals outside stocks and spend from it in down markets.
- A lower starting rate: the classic 4% rule is essentially a plan sized for the worst sequence on record.
- Flexible income: part-time work or delaying Social Security can reduce early withdrawals.
Assumptions
- Spending of $45,000 rises with inflation every year. Withdrawals happen at the start of each year.
- 60% S&P 500 and 40% 10-year Treasuries, using actual real returns for 1966–1995.
- The steady path earns the same average yearly return (compounded) every year. No taxes or fees.
New to a term? See the retirement income glossary.
Common questions
What is sequence of returns risk in simple terms?
It’s the risk that poor investment returns happen early in retirement, when you’re withdrawing money, causing damage that later good years can’t fully repair.
How do you protect against sequence of returns risk?
Common approaches are a cash or bond bucket for the first few years, flexible spending rules like guardrails, and a conservative starting withdrawal rate.
Does sequence risk matter before retirement?
Much less, because without withdrawals the order of returns doesn’t change your ending balance. The exception is the last few years before you retire, when a crash shrinks the savings you’re about to start drawing from.
Related tools
How we calculate this
We take the actual sequence of real returns for your chosen 30-year stretch, run your withdrawals through it, then run the identical returns in reverse order and as a constant average. Any difference comes only from the order.
Data: S&P 500 total returns, 10-year Treasury and 3-month Treasury bill returns as compiled by Aswath Damodaran (NYU Stern), and CPI-U inflation from the U.S. Bureau of Labor Statistics, 1928–2025 (2025 preliminary). Read the full methodology and limitations.