Sequence of Return Risk:
Why the Order of Returns
Can Matter as Much as the Average
Two retirees can earn the exact same average return over 15 years and end up with dramatically different account balances — simply because of when the down years occurred. Here is what that means for your withdrawal rate, and how a bond ladder may help.
This page is for general educational purposes only and does not constitute individualized investment, tax, or legal advice. Hypothetical illustrations do not represent any actual account or guarantee of future results.
Same Average, Different Outcome
Overview
What Is Sequence of Return Risk?
Sequence of return risk is the danger that the order in which investment returns occur — not just their long-term average — can meaningfully affect how long a retirement portfolio lasts, particularly once regular withdrawals begin.
The Core Problem
Order Matters
not just the average return
While you are accumulating savings and adding money over time, the order of returns matters less. Once you begin withdrawing, it can matter a great deal.
Who Is Most Exposed
Early Years
of retirement carry the most risk
The first five to ten years after you stop working — sometimes called the “retirement red zone” — tend to have the greatest influence on how long a portfolio can support withdrawals.
Why It’s Overlooked
Averages Mislead
a 4% average can hide a wide range of paths
Long-run average return assumptions used in many retirement projections can obscure just how different two paths to the same average can look in dollars and cents.
Accumulation and distribution behave differently.
While you are still working and contributing, a market downturn can actually help you — you are buying shares at lower prices. Once you begin taking regular withdrawals in retirement, that same downturn can force you to sell shares at depressed prices to generate cash, permanently reducing the number of shares left to participate in a later recovery. This is the essence of sequence of return risk.
The Data
A Side-by-Side Hypothetical Illustration
Both hypothetical portfolios below start with $1,000,000, withdraw $40,000 (4%) per year for 15 years, and earn an identical 4.4% average annual return. The only difference is the order in which the returns occurred. Click either panel below to view the year-by-year detail.
| Year | Investment Value | Withdrawals | Return |
|---|---|---|---|
| 0 | $1,000,000 | – | – |
| 1 | $1,036,800 | -$40,000 | 8% |
| 2 | $1,106,448 | -$40,000 | 11% |
| 3 | $1,258,409 | -$40,000 | 18% |
| 4 | $1,388,986 | -$40,000 | 14% |
| 5 | $1,510,864 | -$40,000 | 12% |
| 6 | $1,603,242 | -$40,000 | 9% |
| 7 | $1,735,199 | -$40,000 | 11% |
| 8 | $1,847,766 | -$40,000 | 9% |
| 9 | $1,934,310 | -$40,000 | 7% |
| 10 | $1,989,026 | -$40,000 | 5% |
| 11 | $1,871,065 | -$40,000 | -4% |
| 12 | $1,684,579 | -$40,000 | -8% |
| 13 | $1,397,892 | -$40,000 | -15% |
| 14 | $1,276,419 | -$40,000 | -6% |
| 15 | $1,174,598 | -$40,000 | -5% |
| Year | Investment Value | Withdrawals | Return |
|---|---|---|---|
| 0 | $1,000,000 | – | – |
| 1 | $912,000 | -$40,000 | -5% |
| 2 | $819,680 | -$40,000 | -6% |
| 3 | $662,728 | -$40,000 | -15% |
| 4 | $572,910 | -$40,000 | -8% |
| 5 | $511,593 | -$40,000 | -4% |
| 6 | $495,173 | -$40,000 | 5% |
| 7 | $487,035 | -$40,000 | 7% |
| 8 | $487,268 | -$40,000 | 9% |
| 9 | $496,468 | -$40,000 | 11% |
| 10 | $497,550 | -$40,000 | 9% |
| 11 | $512,456 | -$40,000 | 12% |
| 12 | $538,600 | -$40,000 | 14% |
| 13 | $588,348 | -$40,000 | 18% |
| 14 | $608,666 | -$40,000 | 11% |
| 15 | $614,159 | -$40,000 | 8% |
Why It Happens
The Mechanics Behind the Gap
A $560,440 difference in ending balance from the identical average return is not a rounding error — it is the mathematical result of withdrawing a fixed dollar amount from a shrinking base during down years.
Withdrawals Continue Regardless
A retiree drawing income generally needs that income whether the market is up or down that particular year.
Losses Are Locked In
Selling shares to fund a withdrawal during a decline permanently removes those shares — they are no longer available to participate in the eventual rebound.
The Base Shrinks Faster
A smaller portfolio must work harder in later years to recover, even once positive returns resume, because the withdrawal represents a larger share of a smaller balance.
Early Years Set the Trajectory
Because compounding builds on whatever base remains, the returns experienced in the first several years of retirement carry outsized influence on long-term outcomes.
Withdrawal Rate
The Lever You Can Actually Control
You cannot control what the market does in your first year of retirement. You can control how much you choose to withdraw, and how flexible that withdrawal is when markets move against you.
Fixed-Dollar Withdrawals
- Withdraws the same dollar amount every year regardless of portfolio performance
- Simple and predictable for budgeting purposes
- Offers no built-in adjustment when a downturn strikes early in retirement
- Represents a larger percentage of the portfolio in down years — exactly when sequence risk bites hardest
- This is the approach modeled in the hypothetical illustration above
Flexible / Dynamic Withdrawals
- Adjusts withdrawal amounts based on portfolio performance, using pre-set “guardrails”
- May reduce spending modestly in down years to preserve principal for recovery
- Can allow for increased spending after strong years
- Requires more active monitoring and periodic recalibration
- Does not eliminate sequence risk, but can meaningfully reduce its impact
One tool some retirees use to help manage this risk: a bond ladder.
Learn how a bond ladder may help reduce the impact of sequence of return risk →
Frequently Asked Questions
Common Questions Answered
Sequence of return risk is a nuanced topic. These are some of the questions we hear most often from clients approaching or entering retirement.