This week, RFA’s Director – Financial Planning, Gabe Adams, CFP®, MSPFP, explains sequence of return risk and how the order in which you receive your investment returns—especially in retirement—can affect your plan. He also shares several strategies for managing this risk.


Hello. Today, I am going to discuss what can be an overlooked aspect of investing – how the order, or sequence, in which you receive returns can affect your plan. I am then going to review how this can affect your retirement and some strategies that can mitigate this risk.

What Is Sequence of Returns?

In short, sequence of returns is the order in which your investment returns occur, as returns are very unlikely to occur in a straight line. For example, say two investors each start with a $100,000 balance and receive a 5% average annual return over a three-year period. However, the returns do not occur in a straight line and the first investor, investor A, has a negative 10% return in the first year while the second investor, investor B, has a negative 10% return in the last year. If there are no deposits or withdrawals coming in or out of the portfolio, order of returns is a non-factor and both investors have the same results.

How Can Portfolio Withdrawals Affect Investment Returns?

Now, when withdrawals come into play, two investors can end up with different results. Let’s look at investor A and investor B again from the previous example but assume that they each withdraw $10k annually. Investor A receives annual three year returns of -10%, 15% and 10% while investor B receives returns in the reverse order.

Investor A

Year Return Withdrawal Ending Portfolio Value
0 N/A N/A N/A – $100,000 starting balance
1 -10% $10,000 $80,000
2 15% $10,000 $82,000
3 10% $10,000 $80,200

Investor B

Year Return Withdrawal Ending Portfolio Value
0 N/A N/A N/A – $100,000 starting balance
1 10% $10,000 $100,000
2 15% $10,000 $105,000
3 -10% $10,000 $84,500

Even though they received the same average annual return of 5%, investor B ends up with a balance over $4k larger than investor A. There are a few reasons for this. First off, investor A’s negative return in year one occurs at the beginning of the period when there are more assets in their portfolio, not to mention that a withdrawal is made from the reduced balance. Then, there is less remaining in the portfolio to recover in years two and three.

Sequence of Return Risk in Retirement

The order in which you receive returns, especially early in retirement, can be impactful. Let’s look at a potential real-life example using the S&P 500 index. Many of you probably remember 2008, in which this index dropped by more than 38%. This would have been a tough time to retire. To illustrate, let’s look at investor A again, who retired in 2008. On the other hand, investor B retired in 2009. In this example, they both started with a $1M portfolio and withdrew $40k per year inflating at 3%.

Investor A (Retired 2008)

Year Return Withdrawal Ending Portfolio Value
N/A N/A N/A N/A – $1M starting balance
2008 -38.49% $40,000 $575,100
2009 23.45% $41,200 $668,761
2010 12.78% $42,436 $711,793

Investor B (Retired 2009)

Year Return Withdrawal Ending Portfolio Value
N/A N/A N/A N/A – $1M starting balance
2009 23.45% $40,000 $1,194,500
2010 12.78% $41,200 $1,305,957
2011 0% $42,436 $1,263,521

* Source for S&P 500 returns –

What a difference a year makes. Investor A, who unfortunately retired in 2008 ended the first three years of retirement down nearly 30% from their starting balance. Investor B ended up with $550k more than investor A by retiring only one year later! Although not illustrated, the order of returns can have a lasting impact throughout a decades-long retirement given that investor A has a smaller balance that can recover. Additionally, what if investor A also had a large purchase in 2008, such as a new home? A larger withdrawal would further magnify the results of their negative sequence.

Strategies for Managing Sequence of Return Risk

As should be evident, the order in which you receive returns could really impact your retirement. That said, there are several strategies to consider. First off, managing portfolio risk is key. You may have heard from your RFA Advisor to take the amount of risk required to meet your goals, and a portfolio with 100% equities is unlikely to be appropriate for many of you nearing or early in retirement. Diversifying your portfolio with high quality bonds can potentially serve as a ballast, or buffer, to stocks. Additionally, holding cash for short-term withdrawal needs can help. That way, you can avoid withdrawing from your portfolio in a difficult market. It is also important to periodically rebalance your portfolio back to its target asset allocation to keep your risk level in line with your goals. This is something that RFA does routinely.

Finally, for those of you who have completed a financial plan with RFA, you may be familiar with our bad timing illustration. With this scenario, we review your plan if you experience bad returns early in retirement and evaluate potential adjustments if needed. You should also continuously review your financial plan and portfolio withdrawals over time, including when there is a market downturn.

That was a lot of ground we covered. If you have any questions about this important topic, please do not hesitate to contact your RFA advisor. Thanks so much for listening in, and I’ll see you next time.

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