Sequence of Returns Risk: Why the Order of Returns Matters More Than the Average
By Bob Lobclaw · July 16, 2026
Sequence of returns risk is the danger that the order in which your investment returns arrive — not just their average over time — can make or break a retirement, once you’re withdrawing money instead of adding it. Two retirees can experience the exact same average annual return over 30 years and end up in wildly different places, purely because one hit a string of bad years early in retirement and the other didn’t.
Why order suddenly matters
While you’re working and adding to your portfolio, the order of returns barely matters — a bad year early on just means you buy more shares cheaply while you keep contributing, and a strong recovery later benefits a portfolio that’s still growing. Withdrawals flip that dynamic. Once you’re pulling money out, a market decline forces you to sell more shares to generate the same dollar amount, permanently shrinking the share count left to participate in the eventual recovery. A portfolio that loses 20% in year one of retirement and then averages 7% a year afterward can run out of money decades before an otherwise-identical portfolio that saw those same returns in reverse order.
How it’s calculated and measured
There’s no single formula that spits out a “sequence risk number” — it’s measured by comparing outcomes, not computing a single statistic. Two approaches are standard:
- Historical backtesting. Take the actual sequence of market returns from a specific real starting year (e.g., retiring in 1973 versus 1982) and run your withdrawal plan against it. Comparing ending balances, or whether the portfolio survives at all, across many different historical starting years shows how sensitive a given withdrawal rate is to the sequence you happen to retire into. The historical modeling tool lets you replay any real 10-year stretch since 1970 against your own numbers.
- Monte Carlo simulation. Rather than relying on the handful of sequences history happened to produce, generate thousands of random return sequences drawn from a statistical model of market behavior, and run the withdrawal plan against each one. The share of simulations that end with money remaining — the “success rate” — is a direct measure of how much sequence risk a given spending plan is exposed to. This is the approach behind the retirement calculator’s simulation, detailed further on the Data & Logic page.
Both methods point at the same underlying idea: an average annual return tells you almost nothing about whether a withdrawal plan survives. The dispersion of outcomes across different orderings of that same average is what matters, and it’s largest in the first 5–10 years of retirement — the window during which a bad sequence does the most permanent damage to a portfolio that’s also being drawn down.
Strategies to reduce the risk
Hold a cash or bond buffer
Keeping one to three years of spending in cash or short-term bonds gives you somewhere else to draw from during a down market, instead of being forced to sell depressed equities to fund that year’s withdrawal. The buffer doesn’t need to cover a whole downturn — it just needs to buy enough time for stocks to recover before you have to touch them again.
Use a variable, not fixed, withdrawal rate
A fixed dollar withdrawal that only ever rises with inflation ignores what the portfolio actually did that year. Rules that flex spending down after a bad year (and allow more spending after a good one) reduce how much is sold at depressed prices, directly blunting sequence risk at the cost of some year-to-year spending stability.
Consider a rising equity glide path
Counterintuitively, entering retirement with a lower equity allocation and gradually increasing stock exposure over time — rather than the traditional glide toward safety — has tested well against sequence risk in historical backtests, since it reduces exposure to equities during exactly the years a bad sequence would do the most damage. See the glide path strategies article for the mechanics and the caveats.
Delay or reduce withdrawals early on
Working part-time, delaying full retirement, or drawing down taxable savings before touching a retirement portfolio all reduce the amount pulled from investments during the vulnerable early years. Even a modest reduction in early withdrawals meaningfully lowers the odds that a bad sequence forces permanent damage.
Delay Social Security to shrink the withdrawal need
Every year Social Security is delayed increases the eventual benefit, which permanently lowers how much income the portfolio has to supply once benefits start. Bridging the gap years with portfolio withdrawals or cash reserves, then leaning more on a larger guaranteed benefit afterward, shifts risk away from the portfolio during the years it’s most exposed.
Diversify beyond a single stock/bond mix
Return streams that don’t move in lockstep — different asset classes, geographies, or a small allocation to guaranteed-income products like annuities — reduce how correlated a bad year in one holding is with a bad year everywhere else, softening the worst-case sequences without necessarily lowering the long-run average return.
The bottom line
Sequence of returns risk is the reason two people with identical average returns and identical withdrawal rates can have completely different retirements — and it’s largest in the first decade after you stop working. No single strategy eliminates it, but a cash buffer, flexible spending, thoughtful equity glide path, and delayed Social Security can all reduce how much a bad early sequence can hurt. Run your own numbers against real historical sequences on the historical modeling page, or see how thousands of simulated sequences treat your plan in the retirement calculator.
Educational content, not personalized financial advice — see the disclaimer.