Sequence of Returns Risk Explained, With Examples

Written by Thomas Lovas Lokoy — researched and drafted with AI assistance from published sources; edited and published by NorwegianSpark SA · Last updated: August 2026

Capital at risk. The figures below are arithmetic illustrations using made-up return sequences. They are not forecasts, not historical returns, and not a claim about any fund or market. Your own outcome depends on returns nobody can predict. Nothing here is advice.

Two people retire with the same amount, hold the same portfolio, withdraw the same income, and experience exactly the same set of annual returns. One runs out of money and one dies wealthy. The only difference is the order the returns arrived in.

This is sequence-of-returns risk, and it is the single most underrated risk in retirement planning — partly because the arithmetic is genuinely counter-intuitive until you see it worked through.

First, the case where order does not matter

Start with a portfolio of $500,000 and three annual returns: −20%, +5%, +25%. Leave it completely alone — no money in, no money out.

$500,000 × 0.80 × 1.05 × 1.25 = $525,000

Now reverse the order to +25%, +5%, −20%:

$500,000 × 1.25 × 1.05 × 0.80 = $525,000

Identical, to the cent. Multiplication is commutative, so with no cash flows the order is genuinely irrelevant. This is the control, and it matters: it proves that what follows is caused by the cash flows and nothing else.

Now add withdrawals

Same starting balance, same three returns, but $25,000 withdrawn at the end of each year.

Same returns. Same withdrawals. A gap of $23,062 after three years — and that gap compounds for as long as the withdrawals continue, which in retirement is decades.

The mechanism is straightforward once you see it. A withdrawal taken after a fall sells more shares to raise the same cash. Those shares are permanently gone, so they are not there for the recovery. The loss is not the fall; it is the fall plus the selling into it.

The mirror image, for people still saving

The same arithmetic runs backwards, and this half is genuinely good news for anyone still contributing.

Start with $100,000 and add $25,000 at the end of each year, with the same two return sequences.

The saver is better off when the bad year comes first — by the same $23,062, as it happens. Contributions made after a fall buy more shares, and those extra shares participate in everything that follows.

This is why a market fall means opposite things to two people holding identical portfolios. If you are contributing, it is a discount. If you are withdrawing, it is damage. Anyone who tells you a crash is universally good or universally bad has not asked which one you are.

The danger zone

The most exposed period of an investing life is the few years before and after you start drawing on the portfolio. The balance is at its largest, so a percentage fall is at its largest in absolute terms — and it is exactly the moment the cash flow reverses from buying to selling.

A poor decade at 35 is recoverable and, if you keep contributing, actively helpful. The same decade starting at 65 is a different event entirely, because there are no new contributions to buy the recovery and withdrawals are removing shares throughout it.

This is also why "the market always recovers" is true and beside the point. The market recovering does not help a portfolio that sold the shares needed to participate in the recovery.

What actually helps

Note what is not on this list: predicting the sequence. Nobody can, and a strategy that requires it is not a strategy.

Hold spending money outside the volatile portfolio. If the next year or two of withdrawals sits in cash or short-dated instruments, a bad year does not force any selling at all — you spend the buffer and let the portfolio recover untouched. This is the single most effective defence and it is the whole idea behind our yield ladder for money you need within 12 months and one-to-five-year money.

Be willing to flex the withdrawal. A fixed inflation-linked withdrawal taken regardless of conditions is the assumption that makes the arithmetic bite hardest. Reducing withdrawals modestly in bad years dramatically improves the odds, and small early adjustments beat large forced ones later.

Shift the allocation as the switch approaches. Reducing volatility in the years around the transition targets the risk precisely where it lives, rather than sacrificing decades of growth to avoid it.

Do not stop contributing during a fall, if you are still in the accumulation phase. The table above is the argument. Stopping contributions in a downturn converts the one structural advantage a saver has into nothing.

Keep contributing and withdrawing mechanical. Dollar-cost averaging is partly a defence against exactly this: it guarantees that some of your buying happens at low prices, because it removes the decision.

Why the average return is a bad summary

The deeper lesson is about the number itself. An "average annual return" is a description of a set of years with the ordering removed — and for anyone putting money in or taking it out, the ordering is a substantial part of the result.

Two portfolios with the same average can produce very different outcomes for the same investor. A plan built on an average return, with no allowance for the order, is a plan built on the one assumption the arithmetic above shows to be insufficient. Our guide to financial independence and early retirement covers the planning side, and investment psychology covers the part where people abandon a sound plan at the worst possible moment.

This article is for informational purposes only and does not constitute financial advice. Always consult a qualified financial adviser before making investment decisions.

About this article

This article was written by Thomas Lovas Lokoy — researched and drafted with AI assistance from published sources; edited and published by NorwegianSpark SA. YieldNav is operated by NorwegianSpark SA (org. 834 984 172), founded by Thomas Lovas Lokoy. We are not licensed financial advisers, and nothing here is personalised advice. Read our about page, editorial policy and affiliate disclosure.