Sequence of Returns Risk Calculator
See how the timing of market crashes affects your portfolio — even with the same average return.
What is Sequence of Returns Risk?
Sequence of returns risk is the danger that the timing of market downturns will permanently damage your retirement portfolio. Two retirees with identical average returns can end up with vastly different outcomes depending on when crashes occur.
If the market crashes in your first few years of retirement while you are withdrawing, you sell shares at low prices to cover expenses. This permanently reduces the number of shares that can recover when markets rebound.
How to protect against it
Common strategies include keeping 1 to 2 years of expenses in cash, using a flexible withdrawal strategy (spend less in down years), diversifying into bonds early in retirement, and considering a bucket strategy to segment short and long-term assets.
FAQ
Why does the order of returns matter?
When you are withdrawing money, bad early returns force you to sell more shares to meet the same withdrawal amount. Those shares cannot recover when markets bounce back.
Does this affect the accumulation phase?
Much less so. During accumulation you are buying shares, so crashes let you buy more at lower prices. The risk is primarily in the withdrawal phase.
What withdrawal rate reduces this risk?
Lower withdrawal rates like 3 to 3.5% provide significantly more buffer against bad sequence risk than the standard 4% rule.