Sequence of Returns Risk

Two retirees earn identical average returns over twenty years and one runs out of money. The difference isn't the average. It's the order the returns arrived in.

Last verified 2026-07-25

Averages hide the order, and the order matters

While you're contributing, the sequence of returns barely matters — you end up in nearly the same place regardless of the order the good and bad years arrived in. An early crash even helps, because you're buying at lower prices.

Once you're withdrawing, that symmetry breaks completely. A bad year early means you're selling assets at depressed prices to fund living costs, permanently removing shares that would have participated in the recovery.

Work it with numbers. Two retirees start with $1,000,000 and withdraw $60,000 at the end of each year. One gets returns of -30%, +10%, +50%; the other gets exactly the same three returns in the opposite order, +50%, +10%, -30%. The arithmetic mean is 10% for both.

Worst-first ends at $906,000. Worst-last ends at $1,006,800. Same returns, same withdrawals, same average — a $100,800 gap after three years, and the gap widens every year it continues, because the smaller balance is what the next return applies to. Over a thirty-year retirement this is the difference between a portfolio that recovers and one that doesn't.

Why recovery doesn't undo it

The damage isn't the loss itself — it's that the withdrawal happened while the balance was down.

Selling at depressed prices means selling more shares to raise the same amount of cash. Those shares are permanently gone from the portfolio, so when the market recovers, it recovers a smaller base. The percentage gain is the same; the dollars it applies to are fewer.

This is why the same sequence is harmless during accumulation and dangerous during withdrawal. Contributing during a downturn buys more shares. Withdrawing during a downturn sells more.

What people do about it, and the honest caveat

The common responses all aim at the same thing: avoid being a forced seller in a bad year. Holding a cash or short-bond buffer to fund near-term withdrawals. Reducing spending in down years rather than withdrawing a fixed amount. Shifting allocation as the withdrawal date approaches.

Each carries its own cost — a large cash buffer drags on long-run returns, and variable spending is harder to live on than a fixed figure.

These are described as the recognised approaches, not as recommendations. What's appropriate depends on circumstances no lesson can see, and this is regulated territory.