Glossary
What is sequence-of-returns risk?
Sequence-of-returns risk is the danger that poor investment returns early in retirement, combined with ongoing withdrawals, permanently damage a portfolio. The same set of returns arriving in a different order can mean running out of money or finishing with plenty. It matters most in the first five to ten years.
While you are saving, the order of returns barely matters. A bad year early is actually helpful — your contributions buy more shares cheaply, and you have decades for the market to recover.
Once you are withdrawing, the order becomes decisive. A downturn means selling shares to fund your income, at a discount, and those shares are permanently gone. They are not there to participate in the recovery. Two retirees with identical average returns can end up in completely different places depending on which years were the bad ones.
It is easy to miss, because a single average return figure hides it.
Worked example
The same returns, two different outcomes
Take a fixed set of twenty annual returns averaging 9.5% and a retiree drawing $50,000 a year from $1 million. Put the bad years at the start and the money runs out in year nine. Put the same bad years near the end and the portfolio finishes above $1.3 million. Nothing changed except the order.
Hypothetical illustration for educational purposes only. Not a projection of any actual account. Past performance does not guarantee future results.
Common questions
In roughly the first decade of withdrawals, when the balance is at its largest and there is the most time left for damage to compound. This is sometimes called the retirement red zone — the five years on either side of your last paycheck.
No. You can only change what you are forced to sell and when. Funding near-term income from assets that are not exposed to the market means a downturn does not force a sale, which gives growth assets time to recover.
Let us find out what your portfolio can actually pay you.
Thirty minutes to see where your income will come from. If we are not the right fit, we will tell you.