Sequence-of-Returns Risk
Plain English
Losing money early in retirement can hurt more than losing the same amount later, because you're often withdrawing money at the same time your portfolio is also going down — leaving less to recover when things turn around.
What is it?
Sequence-of-returns risk is the risk that the order in which investment returns occur — not just their average — affects a portfolio's outcome, particularly when regular withdrawals are being made (as in retirement).
Why does it matter?
Two portfolios can have the exact same average annual return over 30 years and end up in very different places, depending on whether the bad years happened early (while withdrawals were also happening) or late.
How does it work?
During accumulation (no withdrawals), the order of returns doesn't affect the final value — only the average matters. During decumulation (withdrawals happening), an early downturn forces you to sell more shares/units at depressed prices to fund the same dollar withdrawal, leaving fewer assets to benefit when the market recovers.
Risks and limitations
This is a mechanical risk, not a prediction — it doesn't tell you when a downturn will happen, only that when it happens matters more during withdrawals than during accumulation.
Questions to ask a professional
How would my plan hold up if a downturn happened in the first few years of retirement rather than the last few? Does my strategy have any flexibility to reduce withdrawals during a downturn?