Sequence of Returns Risk

Why the average return misleads you

If you are contributing to a portfolio and never taking money out, the order of returns genuinely does not matter. Multiply the same set of annual returns in any sequence and you land on exactly the same number. That is a mathematical fact and it is easy to verify.

The moment you start withdrawing, that stops being true. Selling units to fund a withdrawal during a downturn means selling more of them to raise the same cash, and those units are not there to participate in the recovery. Two retirements with identical average returns can therefore end decades apart in outcome purely because of when the bad years arrived.

This is why planning on an average return is dangerous for anyone drawing an income. The average is a summary of the path, and the path is what pays your bills.

How this calculator isolates the effect

Both runs use exactly the same set of annual returns. One takes them in order, with the poor years at the start, and the other takes the identical set in reverse. Nothing else differs: same starting portfolio, same withdrawal, same inflation adjustment.

Because only the ordering changes, the entire difference in outcome is attributable to sequence. There is no hidden assumption doing the work, which is what makes the comparison honest.

Withdrawals are taken at the start of each year and increased annually in line with inflation, which is the standard convention for retirement modelling.

What to do about it

The practical responses are well established and unglamorous: hold enough in cash or short bonds to fund the first few years without selling equities, stay flexible about the withdrawal amount in bad years, and be honest that a fixed inflation-linked withdrawal is a stronger commitment than most people realise.

The one thing that does not help is choosing a more optimistic average return. Sequence risk is not a problem of expected returns being too low. It is a problem of variance arriving at the wrong time.

Common questions

Is this a prediction of what markets will do?

No. The return set is illustrative and both orderings are equally artificial. The tool exists to demonstrate that ordering matters, not to forecast any particular path.

Why does the order not matter while I am still saving?

Because multiplication is commutative. Without withdrawals, the same returns in any order produce the same result. Turn the withdrawal to zero in the calculator and both lines end at exactly the same place, which is the cleanest way to see it.

Does this apply to people still contributing?

Much less. Contributing during a downturn buys more units cheaply, which is the mirror image of the problem. Sequence risk is mainly a drawdown concern, which is why it matters most in the years either side of retirement.

What withdrawal rate is safe?

This calculator deliberately does not answer that, because the honest answer depends on your horizon, your flexibility and your other income. What it shows is why any single number quoted as universally safe deserves scepticism.