Printable checklist for your desk
Print this worksheet to try the example with your own withdrawal amount.
Download the PDF (large print)The short version. Two retirees can earn the same average return and end up in very different places, because the order of the returns matters once you are taking money out. A bad stretch early in retirement hurts more than the same stretch later. This is called sequence-of-returns risk.
A simple example you can check
Two people each start with $1,000,000 and withdraw $50,000 at the start of every year. Over six years, they earn exactly the same six annual returns, but in opposite order. Person A has the losses first. Person B has the gains first. The average return is 0.0% for both.
| Year | A: losses first | A return | B: gains first | B return |
|---|---|---|---|---|
| 1 | $760,000 | -20% | $1,140,000 | +20% |
| 2 | $639,000 | -10% | $1,199,000 | +10% |
| 3 | $559,550 | -5% | $1,206,450 | +5% |
| 4 | $535,028 | +5% | $1,098,628 | -5% |
| 5 | $533,530 | +10% | $943,765 | -10% |
| 6 | $580,236 | +20% | $715,012 | -20% |
Each year: (prior value minus $50,000) times (1 plus the return). Fixed $50,000 withdrawals with no inflation, for simplicity. Hypothetical, computed by us, not a forecast.
After six years, A has $580,236 and B has $715,012: about $135,000 less for A, even though the returns were identical. If neither person took any money out, both would finish with exactly $948,024, because multiplication does not care about order. The difference comes entirely from withdrawing during the losses: fewer dollars remain invested to recover.
Why it matters near retirement
While you are saving, a drop early on can even help, because you buy more shares at lower prices. Once you are spending from the portfolio, the effect reverses. This is why the first years of retirement are sometimes called the "danger zone," and why the same savings can support different spending depending on when you retire. Our reading of the 4% rule research is that this is the main reason starting rates are set conservatively. See The 4% Rule.
Ways planners respond
These are approaches from the research we reviewed. None is a guarantee, and each has trade-offs.
| Approach | What it does | Trade-off |
|---|---|---|
| Start with a lower rate | Takes less in the early years, when sequence risk is highest. | Less spending early. [1] |
| Flexible spending | Cuts or raises withdrawals based on how the portfolio is doing. Morningstar finds flexible methods support a higher starting rate. | Income varies from year to year. [1] |
| Guardrails | Guyton and Klinger propose rules that trim withdrawals after poor results and allow raises after good ones. | Requires willingness to cut. The authors' claim is based on simulated history. [2] |
| Cover essentials with guaranteed income | Social Security, a pension, or an annuity can pay for needs that must be met whatever the market does, so withdrawals matter less in a bad year. | Gives up some flexibility and access if an annuity is used. See building an income floor. |
For an overview of how to think about outliving your money, see Outliving Your Retirement Income.
Questions to ask yourself
- If my portfolio fell 20% in the first two years of retirement, what would I change?
- Which expenses must be paid no matter what?
- Where would the money come from in a bad year without selling at a loss?
- Is my withdrawal plan flexible, or fixed in dollars?
Frequently asked questions
What is sequence-of-returns risk?
The risk that poor market returns come early in retirement, when you are withdrawing money. The same average return can leave you with very different balances depending on order.
Why does the order of returns matter?
When you withdraw during a loss, fewer dollars stay invested to recover. In our example two retirees with identical returns ended about $135,000 apart.
How can retirees reduce sequence risk?
Research points to lower starting withdrawals, flexible spending, guardrail rules, and covering essential expenses with guaranteed income. Each has trade-offs.
Sources and review notes
About this guide. This is general education, not tax, legal, or investment advice, and it is not a recommendation. Historical results do not predict the future. The examples are hypothetical and are not forecasts.