The Hidden Risk in Retirement: Why the Sequence of Returns Matters More Than the Average
When most people think about retirement investing, they focus on the average return. For example, if your portfolio averages 6% a year, that sounds safe enough to build a plan around.
But here’s the catch: the order of those returns can matter just as much — and once you start withdrawing from your portfolio in retirement, it can matter even more than the average itself. This is called sequence of returns risk, and it can be the difference between retiring comfortably and running out of money too soon.
Case Study: $500,000 Portfolio, No Withdrawals
Let’s start simple. Imagine you have a $500,000 portfolio invested for 6 years. Over that time, you experience both gains and losses, but your average annual return works out to 6%.
Scenario A: strong positive returns for 4 years, then 2 years of losses.
Scenario B: the same returns, but in reverse order (losses first, positives later).
| Year | Scenario A (%) | Scenario A Balance | Scenario B (%) | Scenario B Balance |
|---|---|---|---|---|
| 1 | 6.00% | $530,000.00 | -9.00% | $455,000.00 |
| 2 | 7.00% | $567,100.00 | -12.00% | $400,400.00 |
| 3 | 3.00% | $584,113.00 | 5.00% | $420,420.00 |
| 4 | 5.00% | $613,318.65 | 3.00% | $433,032.60 |
| 5 | -12.00% | $539,720.41 | 7.00% | $463,344.88 |
| 6 | -9.00% | $491,145.57 | 6.00% | $491,145.57 |
What happens? Both portfolios end at the same value. Even though the ride feels very different — one has losses late, the other has losses early — the end result is identical. That’s because when you’re not withdrawing money, the sequence doesn’t matter. Only the total compounded return does.
Case Study: $500,000 Portfolio, $50,000 Withdrawn Each Year
Now let’s add reality into the picture: retirement withdrawals.
This time, the same $500,000 portfolio draws down $50,000 every year to fund living expenses. The returns are exactly the same as before — the only difference is that you’re taking money out along the way.
| Year | Scenario A (%) | Scenario A Balance (with $50K withdrawals) | Scenario B (%) | Scenario B Balance (with $50K withdrawals) |
|---|---|---|---|---|
| 1 | 6.00% | $480,000.00 | -9.00% | $405,000.00 |
| 2 | 7.00% | $463,600.00 | -12.00% | $306,400.00 |
| 3 | 3.00% | $427,508.00 | 5.00% | $271,720.00 |
| 4 | 5.00% | $398,883.40 | 3.00% | $229,871.60 |
| 5 | -12.00% | $301,017.39 | 7.00% | $195,962.61 |
| 6 | -9.00% | $223,925.83 | 6.00% | $157,720.37 |
The results? Very different:
- In Scenario A (losses late), the portfolio ends at about $224K.
- In Scenario B (losses early), the portfolio ends at just $158K.
That’s a difference of over $65,000 in only 6 years. Stretch this over a 25–30 year retirement, and the gap becomes enormous. This is sequence of returns risk in action.
Why This Happens
When you withdraw during a down market, you’re forced to sell more units to generate the same amount of cash. Those units are gone forever, so when the market recovers, you have less capital left to grow.
This creates a compounding problem:
- Early losses + withdrawals = permanent damage
- Later losses (after years of growth) = more cushion to absorb them
Why a “Flat 6%” Plan Isn’t Enough
Most retirement calculators assume a neat 6% return every year. That’s tidy, but unrealistic. Markets don’t move in straight lines — they bounce, sometimes violently. Two plans with the same “average return” can have completely different outcomes depending on when downturns hit.
How Optiml Helps
This is exactly why Optiml includes the Stress Tester and Success Score:
- The Stress Tester shows what happens if bad markets hit early, late, or repeatedly during your retirement.
- The Success Score shows how resilient your plan is across thousands of possible market paths.
- You can combine this with our tax-aware withdrawal optimization, ensuring you’re not just managing sequence risk but also minimizing the drag of taxes and clawbacks.
The goal isn’t to build a plan that works if everything goes right — it’s to build one that still works if things go wrong.
Key Takeaways
- While you’re saving, the order of returns doesn’t matter.
- Once you start withdrawing, sequence risk can drastically alter your retirement outcome.
- Averages can hide this risk — what matters is how your plan holds up under different market orders.
- Stress testing isn’t optional — it’s essential.
👉 Want to see how your plan holds up under different market paths? Test it today with Optiml and build a retirement that works in good markets, bad markets, and everything in between.
