Sequence of Returns Risk: Why the Order of Your Returns Can Matter More Than the Average

Imagine two people, both retiring with the exact same $1,000,000 nest egg, built over the same 30 years, averaging the exact same 8.30% annual return. Both plan to withdraw $60,000 a year in retirement. On paper, they look identical.

But one of them ends up with over $400,000 left at the end of a 30-year retirement. The other runs out of money entirely by year 20. Same average return. Same starting balance. Same withdrawals. The only difference? The order in which the good years and bad years happened to land.

Why does this happen? When you are withdrawing money from an account at the same time the market is falling, you are forced to sell more shares to generate the same dollar amount — permanently shrinking the base that has to recover later. Investor B experienced the worst returns in the first several years of retirement, right when withdrawals began. Even though the market eventually recovered to average out to the same 8.30% over 30 years, the damage during those early years was already done. Investor A experienced the same returns in reverse order — the good years came first, while the balance was largest, giving the portfolio room to grow before the tougher years arrived.

This is called sequence of returns risk, and it is one of the most overlooked risks in retirement planning. It has nothing to do with how good your investments are on average — it is about timing you cannot predict or control.

The Year-by-Year Detail

Both investors started at age 65 with $1,000,000, withdrew $60,000 at the start of each year, and experienced the exact same 30 annual returns — just in reverse order of each other.

* Investor A’s ending balance is at year 30 (age 95). Investor B’s balance reaches $0 at retirement year 20 (age 85) and stays there.

There’s a Way to Remove That Variable

The only difference between Investor A and Investor B was the order of returns — something no one can control. A Fixed Indexed Annuity with a Guaranteed Income rider can take that specific risk off the table, by guaranteeing income regardless of market sequence.

Because the income is guaranteed rather than tied to a withdrawal rate against a fluctuating balance, it does not matter whether the bad years land first, last, or in the middle of retirement — the income keeps coming either way.