Sequence-of-Returns Risk

The risk that bad market returns early in retirement (or right before) permanently impair a portfolio's ability to sustain withdrawals — even if average returns over the full retirement are fine.

What it actually means

Sequence-of-returns risk is the underappreciated reality that the ORDER of returns matters as much as the average. Two retirees with identical 30-year average returns can have wildly different outcomes: one who experiences the bad years early (forced to sell low to fund withdrawals) runs out of money; one who experiences the bad years late (had time to compound first) ends up with more. Monte Carlo simulation captures this risk; deterministic "average return" projections do not.

Distinguishing it from look-alikes

Sequence-of-returns risk is highest in the 5-10 years immediately before AND immediately after retirement begins. This is why many advisors recommend de-risking in the years approaching retirement (glide-path) and maintaining 1-3 years of cash to avoid forced selling during early retirement bear markets.

Examples

Retire 2008

Bad sequence — first decade saw 2008 crash, then strong 2010s. Many early-retirement portfolios damaged.

Retire 2020

Better sequence — strong 2020-2021, then 2022 bear, then recovery. Portfolios fared better despite identical "average".

Mitigation: 2-3 years cash buffer

Retiring with 2-3 years of expenses in cash + bonds avoids forced selling in early-retirement bear markets — directly addresses sequence risk