Two retirees with identical portfolios, identical withdrawal rates, and the same average annual return over 30 years can end up in completely different places. One ends with more money than they started with. The other runs out at age 78. The difference is the order in which the returns happened.
This is sequence-of-returns risk. It’s the single most underappreciated risk in retirement planning, and it disproportionately determines whether a plan works.
The mechanic
When you’re accumulating — adding money to an account every month — the order of returns barely matters. Bad early years just mean you’re buying more shares cheaply, which works in your favor when markets recover.
When you’re distributing — taking money out every month or year — the math reverses. Selling shares during a down market means selling more shares to fund the same dollar withdrawal, which permanently shrinks the portfolio. Even if the market recovers later, you’ve sold those shares at the bottom and lost their compounding power forever.
A simple example
Two retirees, same starting balance ($1M), same average return (7% over 30 years), same withdrawal ($50K adjusted for inflation each year).
- Retiree A experiences strong returns early, weak returns late. After 30 years: ~$2.8M remaining.
- Retiree B experiences weak returns early, strong returns late. Same average. After 30 years: portfolio depleted at year 23.
Same average. Same withdrawals. Different order. Wildly different outcomes.
Why the first decade matters most
The first 5–10 years after retirement begin sets the trajectory. Bad early returns combined with active withdrawals create a hole the portfolio can never fully climb out of, even if subsequent decades are strong. A 30% drawdown in retirement year 2 with a 4% withdrawal happening simultaneously is materially more damaging than the same drawdown in year 25.
What you can actually do about it
There’s no eliminating sequence risk — markets do what markets do. But several strategies meaningfully reduce its impact:
1. A cash and short-term bond reserve covering 1–3 years of expenses. When markets are down, you spend down the reserve instead of selling equities at depressed prices. When markets recover, you refill the reserve from the equity gains. Buys time for the portfolio to do its work.
2. Dynamic withdrawal rules. Rather than spending exactly 4% of the starting balance forever, use guardrails: spend more when the portfolio is doing well, cut back modestly in down years. Even small adjustments dramatically improve survival probability.
3. Glide path away from equity heavy in the first decade. Counterintuitive — most “rising equity glidepath” research actually suggests the opposite — but the idea of being modestly more conservative right around retirement, then drifting back to equities, has support in the academic literature.
4. Annuitize a portion of essential expenses. A SPIA (single premium immediate annuity) or deferred income annuity for the floor of essential spending eliminates sequence risk for that piece. Less common in our practice for HNW clients but worth modeling.
5. Tax-aware withdrawal sequencing. Where the money comes from matters. Drawing from taxable accounts in down market years (and paying capital gains at low rates if losses can offset) protects the tax-deferred and Roth balances for later compounding.
Why this gets missed
Plans that use a “5% return assumption” or even Monte Carlo with average outcomes routinely underweight sequence risk. The plan looks fine until the first severe drawdown after retirement, at which point the math turns.
Good retirement planning models stress-test against the worst historical sequences — the 1929 retiree, the 1969 retiree, the 2000 retiree — not the average. If your plan only works in average conditions, it’s not really a plan.
If you’d like to see how your plan holds up against the bad sequences in history rather than just the average ones, we’d be glad to model it.
General educational information. Sequence-of-returns risk modeling depends on individual circumstances, time horizon, and assumptions about future returns and inflation. Not personalized advice.