What is sequence of returns risk and why does it matter?
David TalleyUpdated December 12, 2025
Quick Answer
Sequence of returns risk is the danger that market downturns early in retirement can permanently damage your portfolio, even if long-term returns are average. When you're withdrawing money, a down market forces you to sell more shares to meet expenses—those shares aren't there to recover when markets rebound.
This is one of the most underappreciated risks in retirement planning. Let me explain why it matters so much.
The concept:
During your working years, a bad market early on barely matters—you have decades to recover. In retirement, the opposite is true. Early losses combined with withdrawals can devastate a portfolio.
An example:
Two retirees both average 7% returns over 30 years:
- Retiree A: Gets the bad years early, good years later
- Retiree B: Gets good years early, bad years later
Even with identical average returns, Retiree A runs out of money while Retiree B ends up wealthy. The order of returns matters enormously when you're withdrawing.
Why it matters:
- The first 5-10 years of retirement are critical
- A bear market right as you retire can force you to sell low and never recover
- This is why the 4% rule isn't guaranteed—it assumes average sequence of returns
What you can do about it:
1. **Build a cash buffer**: 1-2 years of expenses in cash so you don't have to sell stocks in a downturn
2. **Adjust spending**: Be flexible—reduce withdrawals in bad years if possible
3. **Consider a bond tent**: Higher bond allocation early in retirement, gradually shifting to stocks
4. **Delay Social Security**: Use portfolio early, then switch to Social Security for a more stable income base
5. **Part-time work**: Even modest income in early retirement reduces the pressure on your portfolio
The planning implication:
This is why retirement planning isn't just about "having enough"—it's about structuring your withdrawals to be resilient. A good plan accounts for bad sequences, not just average outcomes.
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