Sequence of returns risk.
In plain English
Sequence of returns risk is the risk that the order of investment returns matters when you are taking money out of a portfolio. Two portfolios with the same average return over 30 years can end up with wildly different outcomes if one starts with several bad years and the other ends with them. The retiree taking withdrawals in the bad early years sells more shares at depressed prices, locking in losses that do not recover even if the market does. The same math also works in reverse for someone in the accumulation phase, but the effect is far less severe when no withdrawals are happening.
01Why it matters
Sequence of returns is the central reason traditional 4% safe-withdrawal rules exist. A retiree who starts withdrawing in 2000 or 2008 faces a meaningfully different portfolio path than one who starts in 1995 or 2009, even if 30-year averages eventually match. Strategies like cash buffers, dynamic withdrawal rules, and partial annuitization exist mostly to manage this single risk.
02The math, step by step
Two retirees each start with $1 million and withdraw $40,000 per year. Both experience the same 30 returns over 30 years, but in reverse order. The one whose first 5 years are a bear market can run out of money by year 22; the one whose last 5 years are the bear market ends with over $1 million. Same average return, opposite outcomes.