Sequence-of-Returns Risk
Why it matters for your retirement paycheck
A market drop in year one or two of retirement, combined with ongoing withdrawals, permanently shrinks the base a portfolio has left to recover from — even if the market fully rebounds afterward. The identical drop happening in year fifteen instead does far less damage, because there's a larger base and less time pressure. This is why two retirees with the same average lifetime return can end up with very different outcomes, purely based on timing.
An example
Two retirees each start with $1,000,000 and withdraw $50,000 at the start of each year. Over two years both get the same returns, −20% and +25%, just in opposite order. Without withdrawals, either order would leave exactly $1,000,000. With withdrawals, the retiree who gets −20% first ends year two with $887,500; the one who gets +25% first ends with $910,000. Same returns, $22,500 apart, purely because of timing. Illustrative figures only.
Related terms
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