Sequence of Returns Risk: The Retirement Danger No One Talks About

Ron Madey, CFA · 4 min read · April 2026

It's not just about how much your portfolio earns on average. It's about when it earns it. The order of returns matters enormously in retirement.

Why Order Matters

If you experience a severe market downturn in the early years of retirement, while you're taking withdrawals, you permanently reduce your portfolio's ability to recover. You're selling low and locking in losses. The same average return in a different sequence can produce very different outcomes.

How to Manage It

Sequence risk is managed through asset allocation, withdrawal flexibility, maintaining a cash buffer, and tactical income strategies, not by trying to time the market. The goal is to avoid being forced to sell equities during downturns.

Two Retirees, Same Average, Different Endings

Here is a hypothetical to make it concrete. Say two retirees each stop working with $1.2 million and each withdraw $60,000 a year, adjusted for inflation. Over twenty five years their portfolios earn the identical average return. The only difference is the order. Retiree A absorbs a deep market decline in years one and two, then enjoys the recovery. Retiree B gets the good years first and the decline in year twenty. Retiree B finishes comfortable. Retiree A can run out of money. Same average, same withdrawals, very different endings. That is sequence of returns risk in one paragraph.

The Math Behind It

The mechanics are simple and unforgiving. Suppose the market drops sharply in a year when you also withdraw for living expenses. The portfolio takes two hits at once. The shares you sold at depressed prices are gone. They are not there to participate when prices recover. A saver in her forties experiences the same downturn as a discount on new shares. A retiree taking withdrawals experiences it as permanent depletion. This is why the years just before and just after retirement carry the most risk. The portfolio is largest then, withdrawals are starting, and there is the least time left to recover.

Why Averages Hide the Problem

Most retirement projections are built on an assumed average return, and averages are exactly the wrong lens for this risk. An average tells you what happens over the whole period. It says nothing about the path. Two paths with the same average can include very different early years, and for a portfolio under withdrawal, the early years dominate the outcome. This is why a plan that only shows you one smooth projection line is incomplete. The more honest question is not what happens if you earn the average. It is what happens if the worst years come first, and whether the plan survives that.

What Actually Protects You

You cannot control the sequence you get. You can control how exposed you are to a bad one. In practice that comes down to a few tools working together. A cash and short-term bond reserve that covers a few years of withdrawals, so a downturn never forces you to sell stocks at the bottom. A withdrawal rate with some give in it, so spending can flex down in a bad year instead of compounding the damage. An allocation set by when you will need the money, not by how the market feels. And a willingness to revisit the plan every year, because the right answer at 64 is not the right answer at 75.

How We Approach It

Sequence risk is one of the six wealth risks we map for every client, and it drives how we structure retirement income. We separate near-term spending money from long-term growth money, test the plan against bad sequences rather than average ones, and set withdrawal guardrails in advance so the decisions in a downturn are already made. If you want a first look at where your own plan stands, start with the calculators on the Retirement Hub.

Questions We Hear

When is sequence risk highest?

Roughly the years on either side of your retirement date. Your balance is at or near its peak, withdrawals are beginning, and there is limited time to recover from a deep decline. Earlier in your career the same downturn is far less damaging, because your contributions are buying shares at lower prices.

Does sequence risk matter while I am still saving?

Much less. While you are contributing, a downturn means your new money buys more shares. The risk flips when the direction of the cash flow flips. The day withdrawals begin, the order of returns starts to matter as much as the average.

Can sequence risk be eliminated completely?

Not realistically, short of holding no stocks at all, which introduces a different risk: outliving your money. The practical goal is to reduce the odds that a bad sequence forces bad decisions. Reserves, flexible spending, and a deliberate allocation do most of that work.

How large should a cash reserve be?

It depends on your withdrawal needs, your other income sources like Social Security or a pension, and your allocation. Many retirees hold enough in cash and short-term bonds to cover a few years of planned withdrawals. The right number is personal, which is why we size it inside a full plan rather than by rule of thumb.