Sequence of returns risk, explained

The example

Both portfolios start at $1,000,000, take $45,000 a year at the start of each year and get the same 30 returns after inflation: −20%, −10%, 0% and then 6% for 27 years. One gets them in that order; the other in reverse.

The average return is identical. The difference comes from selling more shares after a fall: money withdrawn at the bottom is no longer there when prices recover.

When the risk is highest

In the years just before and just after retirement, when the balance is largest and withdrawals begin. A fall of 20% at 30 with a small balance matters little; the same fall in the first year of retirement shapes the rest of it.

Ways people manage it

• A lower starting rate. Morningstar's 30-year rate of 3.9% already allows for bad sequences in its simulations.
• Flexible spending. Cutting withdrawals after a bad year, for example by skipping the inflation raise.
• A cash or bond reserve. One to three years of spending, so you do not have to sell after a fall.
• Other income early on. Part-time work or a Social Security start date chosen with the gap in mind.

Questions people ask

What is sequence of returns risk in retirement?

The risk that poor returns arrive early, while you are taking money out, so the portfolio runs down faster than the average return would suggest. With $45,000 a year from $1,000,000, the bad-start order above leaves $0 after 30 years.

Is sequence of returns risk real?

Yes, whenever money is being withdrawn. Without withdrawals, the order of returns does not change the end balance: $1,000,000 with the same 30 returns ends at $3,472,089 in either order.

When does sequence of returns risk end?

It fades as the balance grows relative to withdrawals or as retirement goes on. After about the first decade, a fall affects fewer remaining years of withdrawals.

Test your plan

The how long will my money last calculator runs every scenario with two bad years first. The 4% rule explained shows how starting rates allow for it.

Sources

• Amy C. Arnott, "How Much Can You Safely Withdraw If You Retire Early?", Morningstar, September 15, 2026 (data as of September 30, 2025).
• William P. Bengen, "Determining Withdrawal Rates Using Historical Data", Journal of Financial Planning, October 1994.

Keep reading

• How long will $1 million last in retirement?

  Years $1 million lasts by withdrawal and return, for $500,000 and $2 million too, and what two bad years at the start do.

• Can I retire with $500K?

  What $500,000 pays a year, how long it lasts at each spending level and what Social Security adds.

• Safe withdrawal rate by retirement length

  Starting withdrawal rates for 30 to 50-year retirements, what they assume and what they mean for your portfolio.

• Health insurance before Medicare

  COBRA, the Marketplace, a spouse's plan or part-time work: the options until 65 and how they fit a retirement budget.