Sequence of Returns Risk Chart: A Worked Example
Sequence of returns risk is easiest to understand as a chart. Below is a worked example you can read line by line: two retirees with the exact same average return end up in completely different places, purely because of the order in which their good and bad years arrived. The numbers are a simplified illustration, not a forecast — but the mechanism they show is real.
The Setup
Both retirees start with $1,000,000 and withdraw $50,000 per year (a 5% starting withdrawal). Both experience the same five annual returns: +20%, +15%, +5%, −15%, and −25%. The only difference is the order:
- Retiree A gets the good years first and the bad years last.
- Retiree B gets the bad years first and the good years last.
Because the same five percentages appear in both lists, the simple average annual return is identical for both. Watch what happens to the balance.
The Sequence of Returns Risk Chart
Each year we apply that year's return, then subtract the $50,000 withdrawal. Year-end balances are rounded to the nearest thousand.
Retiree A — good years first
| Year | Return | After return | After $50K withdrawal |
|---|---|---|---|
| Start | — | — | $1,000,000 |
| 1 | +20% | $1,200,000 | $1,150,000 |
| 2 | +15% | $1,322,000 | $1,272,000 |
| 3 | +5% | $1,336,000 | $1,286,000 |
| 4 | −15% | $1,093,000 | $1,043,000 |
| 5 | −25% | $782,000 | $732,000 |
Retiree A ends with about $732,000.
Retiree B — bad years first
| Year | Return | After return | After $50K withdrawal |
|---|---|---|---|
| Start | — | — | $1,000,000 |
| 1 | −25% | $750,000 | $700,000 |
| 2 | −15% | $595,000 | $545,000 |
| 3 | +5% | $572,000 | $522,000 |
| 4 | +15% | $601,000 | $551,000 |
| 5 | +20% | $661,000 | $611,000 |
Retiree B ends with about $611,000.
Reading the Chart
Same starting balance. Same withdrawals. Same five returns. Same average. Yet Retiree B finishes roughly $121,000 behind after just five years — and the gap widens every year the plan continues. Stretch this over a 30-year retirement with a steep early loss, and "behind by $121K" can become "out of money a decade early."
The reason is mechanical: when Retiree B takes losses early, the $50,000 withdrawal is a much bigger bite out of a shrunken portfolio, and there are fewer dollars left to grow when the good years finally arrive. Selling shares at low prices during a downturn does permanent damage that later gains cannot fully repair.
See your own sequence risk — FREE
A Monte Carlo simulation runs thousands of return orders so you see the full range, not just two. Runs in your browser, no signup.
Run a Free Simulation →Why It Only Bites in Retirement
During your working years you are adding money, so an early downturn actually lets you buy cheap — order barely matters. The danger flips once you start withdrawing. That is why sequence of returns risk is concentrated in the years right around your retirement date, sometimes called the "retirement red zone."
Three Ways to Blunt the Damage
- Hold a cash or bond buffer so you can spend from it instead of selling stocks during a downturn.
- Use a bond tent — a temporarily more conservative allocation around your retirement date that tapers back over time. See our bond tent strategy guide.
- Use flexible withdrawals that trim spending after bad years, like Guyton-Klinger guardrails.
How much each helps depends on your numbers. The honest way to find out is to test thousands of return orders, which is exactly what Monte Carlo simulation does.
The figures above are a simplified illustration to demonstrate the mechanism, not a market forecast or a recommendation. Real returns are more variable. This article is educational and not financial advice.
Frequently Asked Questions
What does a sequence of returns risk chart show?
It compares two portfolios that earn the same set of annual returns in opposite order while the retiree withdraws money each year. It shows that the portfolio hit by early losses can run out of money far sooner, despite an identical average return.
Why does the order of returns matter if the average is the same?
When you are withdrawing, an early loss forces you to sell more shares at low prices, permanently shrinking the base that has to recover. During accumulation, when you are adding money, order matters far less.
How do you reduce sequence of returns risk?
Hold a cash or bond buffer to avoid selling stocks in downturns, use a more conservative allocation around retirement (a bond tent), and use flexible withdrawal rules. A Monte Carlo simulation shows how much each approach improves your odds.