Sequence of returns risk is the risk that poor returns arrive in your first retirement years, while you are withdrawing income. Two retirements with the same average return can end very differently depending on when the bad years happen.
While you are saving, a market drop is uncomfortable but your balance has time to recover. Once you are retired and taking income, a drop is different: every withdrawal you make during the downturn permanently removes shares from a smaller balance. Those dollars are not there to recover when values rise again.
That is why the order of returns matters even when the long-run average is identical. Averages describe the whole period. Your withdrawals happen in a specific order, and so do the market's good and bad years.
Simplified illustration with round numbers and constant withdrawals, shown to demonstrate the effect of ordering. It does not predict market performance and does not represent any specific investment.
Retirement A now needs the same income from a much smaller balance. Even if the later years are excellent and both retirements finish with the same average return, A spends the rest of retirement withdrawing from a base that never got the chance to recover.
None of this predicts a downturn or recommends any product. It is a way to see how sensitive a withdrawal plan is to bad luck in its first few years.
Sequence risk matters most when a large share of your monthly income has to come from savings. If you have not measured that share yet, start with your retirement income gap.
Enter your savings, the income you plan to withdraw and a hypothetical early downturn. The calculator illustrates how long savings could last when the losses come first versus later — free, with results on-screen right away.
Open the Sequence of Returns Risk CalculatorFree • Results on-screen right away • No email required
Because you are taking withdrawals. Money you withdraw during a downturn is gone and cannot recover when values rise again, so the same average return produces a different outcome depending on when the bad years arrive.
Generally in the years immediately before and after you start taking income, when your balance is at its largest and withdrawals begin. Later in retirement, a downturn has fewer remaining withdrawal years to affect.
No. It means the timing of losses is worth planning for. Households approach it in different ways, such as holding a cash reserve, adjusting withdrawals in a down year, or covering essential expenses with recurring income. This page is educational and not a recommendation.
This page is educational and general in nature. RetirementLeverage™ and Retirement Planning Store, Inc. do not provide individualized investment, securities, tax, or legal advice; please consult a qualified tax professional or attorney about your own situation. Insurance products and services may not be available in every state, and any guarantees are subject to the financial strength and claims-paying ability of the issuing insurance company.