What Is Sequence-of-Returns Risk, and Why Can It Break a Retirement?

Can two retirees with the same savings and the same average return end up with completely different outcomes? Yes, and the reason is sequence-of-returns risk. It is the danger that the order of your investment returns, not just their average, determines whether your portfolio lasts. If poor market years land early in retirement, while you are withdrawing money, the damage may be permanent even if strong years follow later. Understanding this risk is one of the most important steps in turning a nest egg into income that lasts.

What Is Sequence-of-Returns Risk?

Sequence-of-returns risk is the risk that the timing of gains and losses works against you once you start spending from a portfolio. During your working years, the order of returns barely matters. You are adding money, not removing it; a bad year early on simply means you buy shares at lower prices. Everything changes when contributions stop and withdrawals begin.

"Sequence matters enormously once you stop contributing and start withdrawing. Now, the order of the returns can completely make or break your nest egg, regardless of their average. For example, if your first few years of retirement coincide with negative market returns, your nest egg never has the chance to recover from those losses even if the market recovery is strong."

— Michele Cagan, CPA, Retirement 101

In plain terms: a 20% loss followed by a 20% gain is not a wash when you are also pulling out 4% or 5% a year to live on. Each withdrawal during a downturn locks in losses. The shares you sell at depressed prices are gone; they cannot participate in the recovery. This is why retirement math is fundamentally different from accumulation math.

Why Does the Order of Returns Matter So Much?

Because withdrawals plus losses compound against each other. When a portfolio falls 25% and you withdraw 5% on top of that, the remaining assets must work much harder just to get back to even. Retirement researchers Moshe Milevsky and Alexandra Macqueen describe the window where this danger peaks:

"You are most at risk from a negative sequence of returns during the so-called 'retirement risk zone'—the years immediately preceding and following retirement, when you have the largest amount of money at stake, the fewest number of years left in the workforce, and thus the smallest capacity to recover from market downturns."

— Moshe A. Milevsky, PhD and Alexandra C. Macqueen, CFP, Pensionize Your Nest Egg

How large can the gap get? Their research quantifies it. Using the same average return but different orderings, they show a retiree who hits a negative return first can run out of money a full three years earlier than one who hits the positive return first. Across simulations, they note the spread can grow to a 14-year gap between the earliest and latest "ruin ages." That is the difference between money lasting to 83 versus 97, driven purely by timing luck.

Retirement researcher Wade Pfau frames the stakes bluntly: for retirees, the fundamental nature of risk is not volatility on a statement. It is the threat that poor returns trigger a permanently lower standard of living. That is what sequence risk seeks to describe.

How Does Sequence Risk Work? A Simple Example

Consider two retirees, each starting with $1,000,000 and withdrawing $50,000 per year. Both experience the exact same three annual returns, just in reverse order.

Same average. Same withdrawals. Retiree A ends up tens of thousands of dollars behind after just three years. That gap widens every year afterward, because the smaller balance compounds from a lower base. Stretch this dynamic over a 30-year retirement, and the retiree who draws down during an early bear market may exhaust the portfolio while the luckier retiree leaves a large legacy. Neither did anything wrong. The market simply dealt them different orderings of the same cards.

The mirror image is also true. A worker still contributing during a downturn benefits from buying at lower prices. Sequence risk cuts hardest in one direction: against the person withdrawing.

What Mistakes Make Sequence Risk Worse?

Confusing average returns with realized outcomes. A plan built on "the market averages X% per year" ignores a basic truth: no retiree earns the average in a straight line. As Pfau notes, retirees have reduced risk capacity. Their limited flexibility to earn income leaves them vulnerable to forced lifestyle cuts, and a purely probability-based strategy could backfire.

Holding an accumulation-era allocation into the risk zone. The portfolio that served you well at 45 may carry more drawdown exposure than your withdrawal plan can absorb at 65.

Withdrawing a fixed dollar amount no matter what. Rigid withdrawals during deep drawdowns force you to sell more shares at the worst prices. As Adam Butler, Michael Philbrick, and Rodrigo Gordillo put it in Adaptive Asset Allocation:

"From a purely mathematical standpoint, retirees in particular cannot afford to endure large sustained losses while continuing to also withdraw income."

Overcorrecting into all-cash safety. Fleeing risk entirely creates a different problem: inflation erosion over a multi-decade retirement. Author David McKnight calls this the catch-22 of retirement investing; the growth needed to outpace inflation is the same exposure that creates sequence risk in the first place.

What Can You Actually Do About It?

No approach eliminates sequence risk, and outcomes are not guaranteed. But several tools may reduce your exposure to it:

1. Right-size early-retirement withdrawals. A modest starting withdrawal rate, with flexibility to trim spending in bad years, gives a portfolio room to survive an early drawdown. Retirement income planning is largely the discipline of setting and adjusting that rate.

2. Build a spending buffer. Holding one to three years of expenses in cash or short-term reserves is designed to let you avoid selling depressed assets during a downturn.

3. Manage drawdowns, not just averages. Because early losses do disproportionate damage, an approach that seeks to limit the depth of portfolio declines may matter more in retirement than one that maximizes average return. Mark Spitznagel makes the counterintuitive case in Safe Haven: a risk-mitigation strategy can lose money on its own and still raise a portfolio's rate of compounding and ending wealth, because it prevents the deep losses that compound so destructively. This drawdown-first mindset is central to how Caldric approaches portfolio construction; you can read more in our methodology.

4. Consider guaranteed income for essential expenses. Pfau's research notes that insurance companies can pool sequence and longevity risks across many retirees, which may support spending on core needs that markets cannot disrupt. Annuities involve trade-offs, costs, and credit risk. Evaluating them is a decision to make with qualified professionals; this is general education, not a recommendation.

5. Revisit your rebalancing discipline. How and when you rebalance affects what you sell in a downturn. Our comparison of calendar rebalancing versus tactical allocation walks through the trade-offs.

What Are the Limits of Managing Sequence Risk?

Honesty matters here. Every mitigation carries a cost. Lower withdrawal rates mean less spending. Cash buffers drag on returns in good markets. Drawdown-focused strategies may lag in strong bull runs and are not guaranteed to sidestep every decline. Guaranteed income products trade liquidity and legacy potential for stability. And as William Bernstein reminds investors in The Investor's Manifesto, those who demand complete safety are doomed to receive low returns; some market risk is the price of long-term growth.

The goal is not to eliminate sequence risk. It is to size your exposure so that an unlucky ordering of returns bends your plan without breaking it.

The Bottom Line

Averages are what markets deliver over decades. Sequences are what retirees actually live through. Two portfolios with identical average returns can produce retirements that differ by a decade or more of solvency, purely because of when the bad years arrive. That makes the years just before and after retirement the most consequential window in your entire financial life; it is also the best time to stress-test your plan against an unlucky sequence, not just an average one.

Questions about which approach fits your situation? Start a conversation.