Sequence-of-Returns Risk
Why a crash just after you retire hurts far more than the same crash mid-career.
Sequence-of-returns risk is one of the most important — and least understood — retirement dangers: the order in which your returns occur can make or break your retirement, even if the average return is identical. Timing, not just average, decides whether your money lasts.
The startling truth: two retirees with the exact same average return can have wildly different outcomes — one comfortable, one broke — purely because of the order of returns. Here’s why: once you’re withdrawing, a crash early in retirement is devastating, because you’re selling units at low prices to fund expenses while the corpus is down — permanently destroying capital that can never recover, even when markets rebound (you sold those units). The same crash late in retirement, or mid-career (when you’re adding money, not withdrawing), barely matters. So a bad-returns start to retirement is a worst case, even if great years follow and the average looks fine. This is the deepest reason the drawdownThe worst peak-to-trough fall in a portfolio. phase is so different from accumulation. Defences: hold a cushion of safe assets (2–5 years of expenses in debt/cash) so you can fund early-retirement spending without selling equities in a downturn; use flexible withdrawals (spend less after bad years); and consider a glide path that reduces equityA unit of ownership in a company. right around retirement (when sequence risk peaks), then optionally rises again. Sequence risk is why when you retire — and how you’re positioned in those first few years — can matter as much as how much you saved.
- What it is — the order of returns affects whether your money lasts, even with identical average returns.
- Why — withdrawing during an early crash sells units at lows, permanently destroying capital the rebound can’t restore.
- Worst case — a bad-returns start to retirement; the same crash mid-career (when adding money) barely matters.
- Defences — 2–5 years of safe assets to draw from, flexible withdrawals, and reducing equityA unit of ownership in a company. around retirement (peak risk).
ExampleTwo retirees average 8% over retirement. Asha hits a brutal crash in years 1–3 (withdrawing into it) and runs out by year 22. Bhavna gets those same bad years at the end and dies with money to spare. Identical average return, opposite fate — the sequence did it. Asha’s missing defence: a few years of safe assets to spend from instead of selling crashed equities.
Key takeawaySequence-of-returns risk: the order of returns, not just the average, decides if your money lasts — a crash early in retirement is devastating because you sell units at lows to fund expenses, permanently destroying capital. Defend with 2–5 years of safe assets to draw from, flexible withdrawals, and lower equityA unit of ownership in a company. right around retirement.
FAQs
How do I protect against sequence risk?
Hold a buffer of safe assets (commonly 2–5 years of expenses in debt/cash) so you can fund early-retirement spending without selling equities in a downturn; adopt flexible withdrawals (spend less after bad market years); and consider reducing equity exposure right around retirement (when the risk peaks). These let your equities recover instead of being sold at the worst time.