Sequence of returns risk: when the bad years come matters as much as how bad they are
Sequence of returns risk is the danger that poor market years arrive just as withdrawals begin, draining a portfolio that the same returns in a different order would have left intact.
Same average return, bad years first: money left
$0
Bad years last instead: $1,763,912.
| Bad years first, end balance | $0 |
| Bad years last, end balance | $1,763,912 |
| Return in the other years | 6.5 % |
| Runs out (bad years first) | year 27 |
Worked out by Radif Partners · How we calculate · figures read on irs.gov and healthcare.gov · not personal financial advice
Sequence of returns risk means that two retirees with the same average return can end up in opposite places because the bad years came at different times. Take $1,000,000, withdraw $45,000 a year in today's dollars, and give the portfolio an average real return of 5 % over 35 years, with two years at minus 20 % and every other year at 6.5 %. If the two bad years open the retirement, the money runs out in year 27. If the very same years close it, the portfolio ends with $1,763,912. Nothing differs but the order. The reason is that withdrawals in a falling market sell more shares at low prices, and those shares are not there when the recovery comes. Early retirees are more exposed than most: their horizon is longer, and the first years before 59½ are often paid from a smaller pool of taxable savings and Roth contributions.
Same average, two endings
The calculator builds two paths from one list of returns. In the first, the bad years come first; in the second, the list is reversed. The arithmetic average is identical, so a calculator that uses one steady return would show the two retirees with the same result. The table follows the default case year by year.
| Year | Balance, bad years first | Balance, bad years last |
|---|---|---|
| 1 | $764,000 | $1,017,220 |
| 2 | $575,200 | $1,035,561 |
| 3 | $564,743 | $1,055,098 |
| 5 | $541,742 | $1,098,072 |
| 10 | $469,772 | $1,232,536 |
| 15 | $371,098 | $1,416,893 |
| 20 | $235,808 | $1,669,659 |
| 25 | $50,319 | $2,016,216 |
| 30 | $0 | $2,491,367 |
| 35 | $0 | $1,763,912 |
After the second year, the first retiree holds $575,200 while the second holds $1,035,561. From there the first path never catches up: the same $45,000 now takes a much larger slice of a smaller balance, and the good years have less money to compound. By year 20 the gap is wider than the whole starting portfolio. The bad years at the end hurt the second retiree too, but by then the balance is large and the remaining horizon short.
How deep can the first years fall?
Same average return, bad years first: money left
$0
| Bad years first, end balance | $0 |
| Bad years last, end balance | $1,319,576 |
| Return in the other years | 5.8 % |
| Runs out (bad years first) | year 27 |
Why one average return misleads
Most retirement calculators apply one steady return every year. Run the same case that way, $1,000,000 with $45,000 withdrawn and 5 % after inflation every single year, and the money lasts a century or more. The steady line sits between the two paths above and hides both. It is the result you would get if the market never had a bad year, and it is the result many online tools print.
The reason is the withdrawal. Without withdrawals, the order of returns does not change the end balance at all: multiplying the same growth factors in any order gives the same product. Selling a fixed amount every year breaks that symmetry, because each sale after a loss takes a larger share of the remaining shares. The bigger the withdrawal relative to the portfolio, the stronger the effect, which is why the risk is tied so closely to the starting withdrawal rate.
A longer horizon makes it worse
Stretch the plan to 45 years, the span from 45 to 90, and make the shock heavier: three years at minus 25 % within an average real return of 4 %, with $40,000 withdrawn from $1,000,000. With the bad years first the money is gone in year 15; with the bad years last it ends at $1,736,003. A 4 % starting rate that looks comfortable on a steady-return chart has little room for an unlucky start.
These are stylized paths, not forecasts. Real markets mix good and bad years in every order, and the engine's two paths are the extremes of one list. They are useful because they isolate the effect: whatever the average turns out to be, the first decade of withdrawals carries most of the risk.
The bridge years before 59½ are the exposed ones
For an early retiree the first years have a second weakness. Before 59½, most 401(k) and IRA money is locked behind a 10 % additional tax, so spending often comes from a smaller pot: a taxable brokerage account and Roth contributions. A bad start hits that pot first and hardest. Picture a 48-year-old whose reachable money is $450,000 and who spends $45,000 a year from it until 59½. Two years at minus 20 % at the outset, with the same 5 % average, leave $223,200 after two years. Had the stretch opened with the good years and kept the bad ones for its end, the pot would hold $440,550 at the same date. If the pot runs dry before 59½, the gap has to come from locked accounts, with the penalty, unless an exception is in place.
That is why the order in which accounts open matters as much as the size of the portfolio. Someone who leaves work in or after the year they turn 55 can draw on that employer's 401(k) under the rule of 55, which widens the pool. A 72(t) series or a Roth conversion ladder can feed the bridge from IRA money. The bridge page lays out which account pays which year.
A small bridge pot, two bad years
Same average return, bad years first: money left
$0
| Bad years first, end balance | $0 |
| Bad years last, end balance | $177,300 |
| Return in the other years | 10.0 % |
| Runs out (bad years first) | year 9 |
Ways people reduce the risk
None of these remove the risk; each one moves it. A lower starting withdrawal rate leaves more room for a bad opening. Cutting spending for a year or two after a fall means fewer shares sold at low prices. A cash or bond reserve covering a year or two of spending lets the stock portfolio recover before it is tapped. Part-time income in the first years, the barista FIRE route, shrinks withdrawals exactly when they do the most damage. A later start, by a year or two, both adds savings and shortens the horizon. Run the calculator with your own portfolio, withdrawal and a plausible bad stretch to see which lever matters most for you.