Sequence of returns risk, explained
Sequence of returns risk is the danger that a run of poor returns early in retirement, while you are also withdrawing money, permanently shrinks your portfolio. Two retirees can earn the same average return over 30 years yet finish in very different places, purely because one hit the bad markets first. It is why the order of returns can matter more than the average.
Why the order matters
While you are saving, a market crash is almost a gift: you buy in cheaply and recover later. In retirement it reverses. When you withdraw during a downturn, you sell more shares to raise the same cash, so those shares are gone when the market rebounds. Early losses combined with withdrawals dig a hole that later good years may never fully fill.
A simple illustration
Consider a retiree who starts with $1 million and withdraws $50,000 a year. According to Fidelity, if strong returns come early and a bear market comes later, that portfolio could grow to more than $3 million after 30 years. Flip the order, so negative returns hit early and the bull market comes later, and the same portfolio could be depleted in about 27 years. Same withdrawals, same average, opposite outcomes.
Who is most exposed
The danger peaks in the years right around your retirement date, sometimes called the retirement risk zone, roughly the five to ten years before and after you stop working. Pre-retirees in their early sixties are especially vulnerable because a major downturn at that point leaves little time to recover. A downturn in your forties, by contrast, still has 20-plus years to heal.
How to reduce it
- Hold a cash or short-term bond buffer so you can avoid selling stocks during a slump.
- Keep a moderate stock allocation. Morningstar research found some of the highest sustainable withdrawal rates came from portfolios with 30% to 50% in stocks, not 70% or 80%.
- Stay flexible: trimming withdrawals in a down year eases the pressure dramatically.
See it in your own plan
Averages hide this risk; simulations expose it. Running your savings and spending through thousands of market paths shows how often an unlucky early sequence would sink your plan, and lets you test buffers and allocations before it is your money on the line.