Most retirement projections quote an average annual return. That number is real and useful — but it leaves out one of the most consequential variables in retirement planning: the order in which those returns arrive. When withdrawals are underway, sequence matters as much as the average itself, and the difference can mean a portfolio that lasts versus one that doesn't.
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Why Average Returns Alone Are Incomplete
Average (or arithmetic/geometric mean) returns are useful summary statistics. They describe central tendency over a multi-year period. However, they assume a smooth path that rarely occurs in real markets. Volatility and the ordering of returns introduce path dependency once spending begins.
Consider a simplified, purely illustrative hypothetical (not based on any actual portfolio, client, or historical period, and not a projection of future results):
Two retirees each begin with a $1,000,000 portfolio. Each withdraws $50,000 in the first year, adjusted annually for inflation. Both experience the same set of annual returns over 30 years that produce an identical average annual return. The only difference is the order: one encounters weaker returns in the early years; the other encounters them later.
In scenarios of this type commonly used for educational purposes, the retiree facing early declines can see the portfolio depleted years earlier, while the retiree with stronger early returns may finish with a substantially larger balance. The arithmetic average is the same; the practical outcome is not. Early withdrawals during downturns lock in losses and leave fewer shares to benefit from later recoveries. This effect is amplified by inflation, longevity (many retirements now span 25–30+ years), and the need for ongoing income.
This is why relying solely on historical average returns — or rules of thumb derived from them — adds an incomplete layer of analysis. Monte Carlo simulations, historical rolling-period studies, and scenario analysis attempt to account for variability in sequences, but even these tools involve assumptions about future markets, inflation, spending flexibility, and other variables that cannot be known with certainty.
Relevance in the Current Environment
In mid-2026, several factors make awareness of sequence risk particularly timely for those near or in early retirement:
Equity valuations remain elevated relative to long-term historical norms, which historically has been associated with more modest subsequent multi-year returns in some periods. A large cohort of baby boomers continues to reach traditional retirement ages, increasing the number of portfolios shifting from accumulation to distribution. Markets continue to experience periods of volatility influenced by monetary policy, geopolitical developments, inflation trends, and sector concentration.
None of these factors predicts a specific market outcome. Markets can and do deliver positive returns even from high starting valuations for extended periods. The point is simply that the margin for error in the early retirement years can be narrower when valuations are stretched and withdrawals are underway.
Approaches That May Help Address the Risk
No strategy eliminates sequence of returns risk, because future returns and their order cannot be predicted. Approaches that some investors and advisors explore — subject to individual suitability, risk tolerance, time horizon, and other factors — include:
- Maintaining a diversified portfolio appropriate to the investor's overall plan, which may help moderate the magnitude of drawdowns.
- Building a cash or short-term fixed-income reserve to fund near-term spending needs, potentially reducing the need to sell equities during temporary declines.
- Considering flexible withdrawal strategies that adjust spending in response to market conditions rather than fixed-dollar or fixed-percentage approaches alone.
- Reviewing the overall retirement income plan, including Social Security claiming decisions, potential guaranteed income sources, tax location of assets, and spending priorities.
- Stress-testing the plan under a range of return sequences and inflation scenarios.
These are general considerations only. The suitability of any approach depends on a complete understanding of an individual's goals, resources, risk capacity, tax situation, and other personal factors. There is no guarantee that any strategy will achieve its objectives or protect against loss.
A More Complete View of Retirement Planning
Average investment returns remain an important input. They help set expectations for long-term growth potential. Sequence of returns risk simply adds another essential layer: the path matters, especially when money is leaving the portfolio. Recognizing this complexity encourages more robust planning that looks beyond single-point estimates.
At a Registered Investment Adviser (RIA) firm, fiduciary standards require that advice be provided in the client's best interest. Educational discussions of concepts such as sequence of returns risk form part of the broader process of helping clients understand the variables that can affect retirement outcomes. Plans should be reviewed periodically as personal circumstances, markets, and regulations evolve.
This concept is especially relevant for those approaching or already in retirement, where the transition from accumulating assets to drawing them down marks a fundamental shift in how market volatility affects the plan.
Schedule a Retirement Tax Review
If you're within a decade of retirement — or already there — sequence of returns risk deserves a place in your planning conversation. Contact us to schedule a meeting and we'll walk through how your current plan addresses withdrawal sequencing, tax efficiency, and income flexibility together.
Important Disclosures
This material is provided for educational and informational purposes only and does not constitute investment advice, a recommendation, an offer to sell, or a solicitation of an offer to buy any security or advisory service. It is not intended to address the specific needs of any individual or entity. Hypothetical examples are for illustrative purposes only, involve assumptions that may not reflect actual market conditions or investor experience, and do not represent the performance of any actual investment or client account. Actual results will differ, and losses are possible. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal. Diversification does not ensure a profit or protect against loss in declining markets. The information is believed to be accurate as of the date of publication but is subject to change without notice. Readers should consult their own qualified financial, tax, and legal advisors regarding their particular circumstances before making any decisions. Registration as an investment adviser does not imply a certain level of skill or training.
Frequently asked questions
What is sequence of returns risk?
Sequence of returns risk is the danger that poor investment returns arrive early in retirement, just when withdrawals begin. Because withdrawals force you to sell investments at depressed prices, early losses lock in permanent damage that the same average return experienced in a different order would not cause.
Why does the order of returns matter if the long-run average is the same?
Once withdrawals begin, each sale permanently removes shares from the portfolio. A large loss early in retirement shrinks the base that future growth has to build on, so the portfolio never fully recovers even if returns later improve. Two retirees with identical average returns but different sequences can reach very different endings.
Can sequence of returns risk be eliminated?
No strategy eliminates it, because future returns and their timing cannot be predicted. Approaches such as maintaining a cash reserve, using flexible withdrawal strategies, and stress-testing across multiple return scenarios may help reduce its impact, though each carries its own trade-offs and suitability considerations.
Why is sequence of returns risk especially relevant in mid-2026?
Several factors converge: equity valuations remain elevated relative to long-term historical norms, a large cohort of baby boomers is transitioning from accumulation to distribution, and ongoing market volatility means the window for early-retirement losses is open for many people. None of this predicts a downturn, but it does narrow the margin for error.
What tools do advisors use to analyze sequence of returns risk?
Monte Carlo simulations, historical rolling-period studies, and scenario analysis are commonly used to account for variability in return sequences. Even these tools involve assumptions about future markets, inflation, spending, and other factors that cannot be known with certainty, so they are guides rather than guarantees.