Assumptions
The example starts with $1,000,000 and withdraws $50,000 at the beginning of each year before applying that year's return.
Why the order of returns matters when a portfolio is funding withdrawals, even when the average return looks the same.
Both paths use the same four annual returns and the same $50,000 beginning-of-year withdrawal. The early-loss path ends lower because the portfolio has fewer dollars invested during the later gains.
Point
Early Loss
Late Loss
Start
Early loss$1,000,000
Late loss$1,000,000
After year 1 withdrawal and return
Early loss$760,000 after a -20% return
Late loss$1,045,000 after a +10% return
After year 2 withdrawal and return
Early loss$781,000 after a +10% return
Late loss$1,094,500 after a +10% return
After year 3 withdrawal and return
Early loss$804,100 after a +10% return
Late loss$1,148,950 after a +10% return
After year 4 withdrawal and return
Early loss$829,510 after a +10% return
Late loss$879,160 after a -20% return
Sequence-of-returns risk is the risk that losses arrive early while a portfolio is also funding withdrawals. The four-year example on this page uses the same return set in a different order: -20%, +10%, +10%, +10% versus +10%, +10%, +10%, -20%. The arithmetic average is the same, but the ending value differs because withdrawals occur along the way.
The example starts with $1,000,000 and withdraws $50,000 at the beginning of each year before applying that year's return.
Early losses leave fewer dollars invested for later gains, and withdrawals remove shares or fund units that cannot participate in a recovery.
The four-year table is a simple mechanics example. History shows why the planning question can be longer: you may need withdrawals while a broad market index is still below a prior high. That does not say what comes next. It shows why the withdrawal plan and the risk plan have to be reviewed together.
Peak
Mar. 24, 2000 at 1,527.46
Trough
Oct. 9, 2002 at 776.76
Recovery
May 30, 2007 at 1,530.23
Price-Index Path
The price index fell about 49% from peak to trough and took about 7.2 years from the 2000 peak to first close above that prior high.
Sequence-Risk Lens
A household taking withdrawals through that window would have been selling while the price index was below its prior high for roughly seven years.
Peak
Oct. 9, 2007 at 1,565.15
Trough
Mar. 9, 2009 at 676.53
Recovery
Mar. 28, 2013 at 1,569.19
Price-Index Path
The price index fell about 57% from peak to trough and took about 5.5 years from the 2007 peak to first close above that prior high.
Sequence-Risk Lens
The deepest decline happened quickly, but the recovery window still covered several withdrawal years.
Peak
Mar. 24, 2000 at 1,527.46
Trough
Multiple declines before the 2013 record
Recovery
Mar. 28, 2013 at 1,569.19
Price-Index Path
The 2000 high was first recovered in 2007, then lost during the financial crisis. The post-crisis record close arrived about 13 years after the 2000 peak.
Sequence-Risk Lens
This broader window is why sequence-risk review should not assume every decline is a one-year V-shaped event.
Source
Historical rows use S&P 500 price-index closing levels. They exclude dividends, inflation, taxes, fees, portfolio withdrawals, and any portfolio changes. Dates and levels are based on Standard & Poor's Corporation / Haver Analytics data summarized by Yardeni Research, with 2007 and 2013 record-close dates cross-checked against contemporary market reporting.
If you are still saving, you can often wait for recovery without selling. If you are drawing from the portfolio, you may need to sell after a decline. That is why withdrawal dependence, guaranteed income, cash reserves, account type, and spending flexibility belong in the portfolio record.
The review should identify which dollars may be needed soon and which dollars can accept more volatility.
Withdrawal-source decisions can involve taxable accounts, IRAs, Roth accounts, trusts, or held-away plans, each with different tax and liquidity considerations.
Caldric separates risk willingness, risk capacity, risk composure, and risk need. You can be emotionally comfortable with volatility and still have limited capacity for early retirement losses if your withdrawals are high or liquidity is thin.
Capacity is the balance sheet and cash-flow ability to absorb losses, not merely the investor's stated preference.
Need is the return profile implied by the plan. If need and capacity conflict, the tension should be documented before portfolio design decisions are made.
The four-year table shows the mechanics in a compact way. Real recovery paths can take longer. If withdrawals continue through a multi-year decline or a slow recovery, the portfolio may have fewer dollars participating when gains eventually arrive.
A fast rebound can reduce the time you spend selling from a depressed portfolio, though the early-loss arithmetic still matters.
A slower recovery creates more decision points: which account funds spending, whether the cash reserve is enough, and how much risk capacity remains.
Before choosing a portfolio lane, the review should ask how much must be withdrawn, when the first material withdrawal starts, how flexible spending is, which account should fund distributions, how taxes may affect the withdrawal source, and what level of temporary decline would force a change in behavior.
A process can plan for sequence risk, but it cannot make market returns arrive in a favorable order or guarantee that a liquidity reserve will cover every future need.
It can document the assumptions, withdrawal needs, review cadence, account constraints, and the evidence that would justify a portfolio change.
Sequence risk is one input in portfolio design. The methodology shows how risk capacity, market evidence, and implementation constraints are connected.