Last reviewed: July 2026
Your average annual return over 30 years of retirement does not determine whether your money lasts. The order those returns arrive in does. Specifically, what happens in the first five to seven years of withdrawals may matter more than every investment decision you made in the three decades before you retired. This is sequence of returns risk, and it’s the variable most retirement conversations spend the least time on.
Key Takeaways
- Your average return does not decide whether your money lasts; the order returns arrive in does.
- Sequence of returns risk concentrates in the first five to seven years of withdrawals, when early losses do lasting damage.
- Withdrawal rate matters most; rates above 4-5% sharply increase vulnerability to a bad early sequence.
- A cash buffer of 12 to 24 months of expenses lets you avoid selling equities into a downturn.
- Per the SSA, delaying Social Security from 62 to 70 can raise your benefit by more than 75% at full retirement age 67.
About the Author
About the Author: Jeff Judge, CFP®, AEP®, ChFC®, CLU® is a financial planner who writes Viewpoints for JeffJudgeCFP.com. He helps families and business owners stress-test retirement income against a bad early return sequence before they stop working, using the R.U.D.D.E.R. Method™, the financial planning process Jeff developed. “The variable that decides whether your retirement holds isn’t your average return. It’s whether your portfolio can survive the years when returns arrive in the worst order.”
What Is Sequence of Returns Risk?
Sequence of returns risk is the danger that poor investment returns early in retirement, combined with ongoing withdrawals, will permanently deplete a portfolio in a way that strong long-run average returns cannot fix. A portfolio hit by large losses in years one through five of withdrawals may not recover even if the market subsequently performs well, because withdrawals taken during the downturn lock in those losses and reduce the base that benefits from any recovery.
Two people can retire with identical portfolios, withdraw the same amount each year, experience the same annual returns in reverse order, and end up with dramatically different balances at the end of 30 years. Same average return. Different sequence. Completely different outcome. The math isn’t complicated, but almost no one runs it before they retire.
According to the Social Security Administration, the average retirement age in the U.S. is approximately 65. A 30-year retirement is a real and common planning horizon, not an outlier. The first decade of that window is where sequence risk does the most damage.
Can a strong long-run average return fix a bad start to retirement?
Often it cannot. When large losses hit in the first few years of withdrawals, the distributions you take during the decline lock in those losses and shrink the base that any later recovery can grow. A great average spread across 30 years does not undo damage concentrated at the start.
Which four factors determine whether sequence risk hurts you?
Not every retiree is equally exposed. These four factors determine how much sequence risk threatens your specific plan.
| Factor | What it measures | How it changes your exposure |
|---|---|---|
| Withdrawal rate | Annual distributions as % of portfolio | Higher rates leave less room to absorb early losses; rates above 4-5% increase vulnerability significantly |
| Spending flexibility | Ability to reduce distributions in down years | A 10-15% temporary reduction in a bad year materially extends portfolio longevity |
| Equity allocation at retirement | % of portfolio in stocks at the start of withdrawals | Heavy equity exposure in year one amplifies the damage from an early decline |
| Buffer assets | Cash or short-duration bonds set aside for near-term income | 12-24 months of expenses in a buffer means no forced equity selling during a downturn |
Withdrawal rate. The higher your annual withdrawal as a percentage of your portfolio, the more vulnerable you are to a bad early sequence. A 2% annual withdrawal gives the portfolio room to absorb early losses. A 6% withdrawal taken during a 30% market decline in year two creates a hole that compounds with every subsequent distribution.
Spending flexibility. A retiree who can reduce discretionary spending by 10 to 15 percent during a bad market run has a meaningful structural advantage over one whose spending is fixed. Social Security income and any pension provide a base that reduces the need to sell assets during downturns. Per the Social Security Administration, delaying Social Security benefits from 62 to age 70 can increase your monthly benefit by more than 75 percent for those with a full retirement age of 67. That higher base income directly reduces how much the portfolio needs to distribute during the highest-sequence-risk years.
Asset allocation in the years immediately before and after retirement. The period from roughly five years before retirement to five years after is where sequence risk is most concentrated. A 100% equity allocation makes sense for a 35-year-old. It makes less sense for someone entering the withdrawal phase with no buffer against a severe early decline.
Buffer strategy. A cash or short-duration bond position covering 12 to 24 months of living expenses means you don’t have to sell equities during a downturn to fund your spending. That buffer doesn’t need to be large. But its existence fundamentally changes how a portfolio behaves in the early years of retirement.
What do the numbers show about why average returns mislead?
Here’s a simplified illustration of what the sequence difference actually produces. Two retirees each start with $1,000,000 and withdraw $50,000 per year.
| Retiree A | Retiree B | |
|---|---|---|
| Years 1-2 returns | -20%, -15% | +12%, +10% |
| Remaining years | +10% average annually | +10% average annually, then -20%, -15% in final years |
| 30-year average return | Approximately 7% | Approximately 7% |
| Estimated balance at year 30 | Portfolio likely depleted well before year 30 | Balance likely near or above starting value |
Illustrative only. Actual results depend on return sequence, withdrawal timing, and specific annual figures.
The critical difference isn’t the average. It’s whether the bad years arrive during withdrawals or after them. Per IRS Publication 590-B, required minimum distributions begin at age 73, using a life expectancy factor of 26.5 at that age. For a retiree starting voluntary withdrawals at 65, the window before RMDs begin is precisely when sequence risk is most acute, and when the structure of the portfolio matters most.
Why are the years right before required minimum distributions so important?
Because they overlap with the highest-sequence-risk window. A retiree starting voluntary withdrawals at 65 faces several years before RMDs begin at 73, and that early stretch is exactly when an unlucky return order can permanently shrink the portfolio. Structuring buffers and allocation before then is what protects it.
Why don’t most retirement projections model this honestly?
Sequence of returns risk is hard to visualize and easy to dismiss. When a retirement projection shows an average annual return of 7% over 30 years, the bad scenarios are averaged into the number. The projection looks solid. What it doesn’t show is the distribution of outcomes depending on when the bad years arrive.
The planning industry has historically been better at presenting a single optimistic scenario than at surfacing the range of outcomes under different return sequences. A projection built around average returns tells a smoother story than one that shows what happens if the first five years of retirement include a significant market decline.
Stress-testing a retirement plan against bad early sequences isn’t pessimism. It’s the difference between a plan that only works if returns arrive in the right order and one built to survive the realistic range.
Frequently Asked Questions
What is sequence of returns risk?
Sequence of returns risk is the danger that poor returns early in retirement, combined with ongoing withdrawals, permanently deplete a portfolio that strong long-run averages cannot rescue. Losses in the first years of withdrawals get locked in by distributions, shrinking the base that any later recovery can rebuild.
Why do average returns mislead retirees?
Two retirees with identical portfolios, identical withdrawals, and the same 30-year average return can end with wildly different balances if the bad years fall at different times. The average hides the order. What matters is whether losses arrive during withdrawals or after them, not the smoothed long-run number.
How much cash buffer reduces sequence risk?
A reserve covering 12 to 24 months of living expenses in cash or short-duration bonds lets you fund spending without selling equities in a downturn. It does not need to be large. Its presence changes how the portfolio behaves in the fragile early years of retirement.
Does delaying Social Security help with sequence risk?
Yes, indirectly. A larger guaranteed benefit lowers how much your portfolio must distribute during the high-risk early years. Per the Social Security Administration, delaying from 62 to 70 can raise your monthly benefit by more than 75% at a full retirement age of 67, strengthening your income base.
What can you do before retirement to reduce sequence risk?
There is no single fix. Sequence risk is managed through a combination of decisions that collectively reduce the portfolio’s vulnerability before the withdrawal phase begins.
Build 12 to 24 months of living expenses into a cash or short-duration buffer before you retire. This is not your emergency fund. It’s a dedicated distribution reserve that lets you avoid selling equities in a down market during the first years of withdrawals.
Evaluate whether your withdrawal rate can be reduced by delaying retirement, reducing spending, or optimizing Social Security timing. The decisions that matter most, your withdrawal rate, your buffer strategy, your allocation transition, and your Social Security timing, all need to be made before retirement, not during the first bear market after it.
Transition your asset allocation in the five years before retirement. The goal isn’t to abandon equities. The goal is to reduce the percentage of your portfolio that’s fully exposed to a severe decline in year one or two of withdrawals.
Identify which spending categories are flexible. Knowing in advance that you can cut discretionary spending by $15,000 in a down year gives you options that an inflexible budget doesn’t.
The variable that determines whether your retirement holds isn’t your average return. It’s whether your portfolio structure can survive the years when returns arrive in the worst possible order.
Schedule a no-obligation call with Jeff to run your retirement income strategy through a sequence of returns analysis before you retire.
The information provided is for educational purposes only and should not be construed as investment advice. Investment strategies should be tailored to individual circumstances, risk tolerance, and goals. Past performance doesn’t guarantee future results. Consult with qualified financial professionals regarding your specific situation. Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Great Valley Advisor Group, a registered investment advisor and separate entity from LPL Financial. © 2026 JeffJudgeCFP.com | Not to be reproduced in whole or in part. All rights reserved.