Two investors can have the same average return, but if the bad years come early in retirement, one may run out of money while the other thrives. Understand this hidden danger and how to protect yourself.
Sequence of returns risk is the danger that poor investment returns early in retirement – when you're withdrawing money – can permanently damage your portfolio, even if long‑term average returns are good. It's not just what returns you get, but when you get them.
A portfolio that loses 20% in year one needs a 25% gain just to break even. If you're withdrawing money, the damage compounds.
A bad sequence (losses early) can deplete a portfolio much faster than the same average returns in a different order.
Maintain a cash buffer, reduce withdrawals in down years, or use a rising equity glidepath. Diversification also helps.
Enter your starting portfolio and annual withdrawal. We'll simulate two scenarios with the same average return (5% over 10 years) but different order of returns.
Adjust the values and click the button.
The two scenarios have the exact same average annual return (5% over 10 years). The only difference is the order of returns. See how the ending portfolio can differ dramatically.