Sequence of returns risk: why the order of returns decides your retirement
Sequence of returns risk is the risk that poor returns arrive just as you start withdrawing from your savings. Because withdrawals in bad years use up more units, the same portfolio with the same average return can run out sooner or later depending on the order of the years.
Also: sequence risk · sequence-of-returns risk · Sequenzrisiko · order of returns risk
While you are saving and not withdrawing, the order of good and bad years makes no difference to where you end up. Once you withdraw regularly, it does. A crash in the first year of retirement works out differently from the same crash twenty years later. That is sequence of returns risk. Status: October 2026.
A worked example
Two people each start with €500,000 and withdraw €20,000 at the start of each year. Both get the same three returns, in opposite order.
| Year | Person A: return | A: balance at year end | Person B: return | B: balance at year end |
|---|---|---|---|---|
| 1 | −20 % | €384,000 | +10 % | €528,000 |
| 2 | +10 % | €400,400 | +10 % | €558,800 |
| 3 | +10 % | €418,440 | −20 % | €431,040 |
Without withdrawals both would hold exactly €484,000 after three years, because 0.8 × 1.1 × 1.1 gives the same result in any order. With withdrawals, Person A has €12,600 less. Her next €20,000 withdrawal is 4.78 % of what is left, against 4.64 % for Person B. Over 30 years this gap can decide between an empty and a healthy portfolio.
The reason: Person A sells units at low prices in year one, and those units are missing when prices recover.
What history shows
In his 1994 study, the origin of the 4% rule, William Bengen describes several such cases in US data:
- Someone who retired in 1929 with $500,000 and a 4 % withdrawal had less than $200,000 by the end of 1932. The withdrawal was then about 7.6 % of what remained.
- The 1973–1974 crash, combined with high inflation, shortened the life of portfolios whose withdrawals had started up to 20 years earlier.
- Had the 1929 retiree cut his withdrawal by just 5 % from 1930 on, he would have had about 20 % more wealth by 1949.
What reduces the risk
These approaches are common in planning; which fits depends on your situation.
- Flexible withdrawals: taking a little less in bad years. This is the lever Bengen himself describes. The guide retirement spending guardrails shows how such rules can work.
- A buffer: holding a few years of withdrawals in cash or short-term bonds so a crash does not force sales.
- A lower starting rate: 3.5 % instead of 4 % leaves more room.
- Other income early on: part-time work, a German partial pension (Flexirente) or a later pension start reduce withdrawals in the riskiest first years.
Common misunderstandings
- “I assume a 5 % average return, so it works.” A fixed average return hides sequence risk. Bengen names exactly this mistake as the starting point of his study.
- “It is only about stocks.” High inflation early on has a similar effect, because withdrawals rise.
- “It only affects early retirees.” It affects anyone living off a portfolio; with a long retirement the effect just lasts longer.
In your plan
A single projection with a fixed return does not show the risk. How long will my money last and the retirement bridge calculator show how far your money goes. How a Monte Carlo simulation plays through many possible orders of returns is explained in what a Monte Carlo retirement simulation tells you.