Sequence of Return Risk During Retirement
This page is part of the Wealth Solutions Network educational library. It explains sequence of returns risk, why it matters most during retirement, and how timing—not average return—often determines outcomes. This content is educational in nature and not advice.
​
Investment performance is often discussed in terms of averages. Over long periods, markets have tended to produce positive returns.
​
Sequence of returns risk explains why those averages can be misleading—especially in retirement.
Sequence of returns risk is the risk that the order in which returns occur, rather than the average return, determines whether retirement income can be sustained.
​
WHAT SEQUENCE OF RETURNS RISK IS​
Sequence of returns risk refers to the timing and order of investment returns.
Two portfolios can experience the same average return over time and still produce very different outcomes if gains and losses occur in a different sequence.
​
This distinction matters most when withdrawals are taking place.
​
WHY SEQUENCE MATTERS DURING WITHDRAWALS
When money is being added to a portfolio, early losses can often be recovered over time.
When money is being withdrawn, early losses can permanently impair future income.
During retirement:
-
Withdrawals reduce the asset base
-
Market declines reduce asset values simultaneously
-
Fewer assets remain to participate in any recovery
This interaction makes timing more consequential than averages.
​
AN ILLUSTRATIVE CONTRAST
Consider two retirees with identical portfolios and identical average returns.
​
One experiences stronger returns early and weaker returns later.
The other experiences weaker returns early and stronger returns later.
​
Despite identical averages, the second retiree may face a higher risk of income shortfall because early losses coincided with withdrawals.
​
The difference is not discipline or behavior. It is sequence.
​
WHY SEQUENCE RISK IS HIGHEST EARLY IN RETIREMENT
Sequence of returns risk is not evenly distributed across retirement.
​
It is most acute in the early years, when:
-
The portfolio is largest
-
Withdrawals are beginning
-
Flexibility is highest—but only if assets remain intact
Losses early in retirement compound forward, narrowing future options and reducing margin for error.
WHY DIVERSIFICATION ALONE IS NOT SUFFICIENT
Diversification can reduce volatility, but it does not eliminate sequence risk.
​
If multiple assets decline during withdrawal periods, diversification may soften—but cannot remove—the impact on income sustainability.
​
Sequence risk is driven by timing, not asset selection alone.
​
COMMON MISUNDERSTANDINGS ABOUT SEQUENCE RISK
Several beliefs often obscure this risk:
-
“Markets always recover.”
-
“Average return is what matters.”
“Spending can always be adjusted temporarily.” -
“Diversification solves timing risk.”
These assumptions underestimate how withdrawals magnify the consequences of early losses.
HOW SEQUENCE RISK INTERACTS WITH LONGEVITY
The longer retirement lasts, the more damaging early sequence risk becomes.
​
Early losses:
-
Permanently reduce the income-producing base
-
Increase reliance on favorable future returns
-
Raise the probability of income disruption later in life
Sequence risk and longevity risk reinforce one another.
WHAT GOOD PLANNING DOES DIFFERENTLY
Good retirement planning acknowledges sequence risk and accounts for it explicitly.
​
It:
-
Aligns income needs with appropriate risk exposure
-
Avoids reliance on a single favorable market path
-
Builds buffers against early adverse outcomes
-
Prioritizes income sustainability over return optimization
​
Timing matters in retirement income planning.
Understanding sequence of returns risk is essential for evaluating retirement income strategies and trade-offs.
​