Sequence of Returns Risk

Sequence-of-returns risk is the danger that the order in which investment returns arrive - not just their average - can make or break a retirement plan. Two retirees with the same average return can end up very differently if one suffers poor returns in the first few years of drawing down their portfolio. Early losses combined with withdrawals shrink the base that later gains rely on, and the portfolio may never recover.

While you are saving, a market crash early on can even help, because you buy cheaply and recover later. In retirement the logic reverses: you are selling to fund living costs, so a downturn early forces you to sell more shares at low prices, permanently reducing what remains to grow. The same average return with bad years at the start is far more dangerous than with bad years at the end.

Common defences include keeping a cash or bond buffer to draw on during downturns so you avoid selling stocks low, staying flexible with spending in bad years, and using a conservative withdrawal rate. Some retirees hold a couple of years of expenses in safe assets specifically to ride out a crash. This calculator illustrates why those defences matter by showing how timing changes outcomes.

Not necessarily. A reassuring long-run average can still hide a damaging sequence, especially a rough start to retirement. That is exactly why planning tools model different orderings and volatility rather than a single smooth average. Use this alongside a Monte Carlo simulation to understand the range of outcomes, and build in a margin of safety.